Change of case law in insolvency avoidance law: German Federal Court of Justice requires stronger weighting of the factual circumstances to justify a challenge of transactions based on intent

1. The assumption of the subjective prerequisites for challenge of transaction with intent cannot be based solely on the fact that the debtor is known to be insolvent at the time of the challenged legal act.
    
2. In the case of recognised insolvency, the debtor's intent to prejudice creditors additionally requires that the debtor knew at the relevant time or, in any event, reasonably expected that he would not be able to fully satisfy his other creditors in the future; this depends on the objective circumstances known to him.
    
3. For full proof of knowledge of the debtor's intention to prejudice creditors, in the event of the debtor's recognised insolvency, the opposing party must also know at the relevant time that the debtor will not be able to satisfy its other creditors in the future either; this depends on the objective circumstances known to it.
    
4. As a rule, the debtor's intention to prejudice creditors cannot be based on a mere threat of insolvency at the time of the challenged legal act.
    
5. A particularly meaningful basis for establishing cessation of payments is the debtor's declaration that he is unable to pay for lack of liquid funds; in the absence of such a declaration, the other circumstances indicating cessation of payments must attain a weight corresponding to that of the declaration.
    
6. The strength and duration of the presumption of the continuation of the established cessation of payments depends on the extent to which the inability to pay has become apparent; this applies in particular to the horizon of knowledge of the opposing party.

In the past, the examination of the debtor's inability to pay and the knowledge of the opposing party of indications suggesting the debtor's inability to pay were regarded as the pivotal point for the assessment of the prospects of success of a challenge with intent. However, this alone will no longer be sufficient in the future.

For the determination of intent to prejudice creditors in the case of congruent acts of the debtor (e.g. timely payments after delivery of goods) in the case of recognised insolvency, it is additionally required that the debtor knew at the time of the act or at least accepted that he would not be able to fully satisfy his other creditors "also in the future". This extends the point of reference for the assessment of the intent to prejudice creditors in terms of time. This, in turn, enables the courts to exercise jurisdiction in a way that is more balancing of interests, because future business developments that can be expected at the time of the act play a stronger role in the examination. In addition, "the extent of the present insolvency" shall play a stronger role in the examination. Only if the insolvency has assumed an extent that makes it unlikely that the other creditors will be fully satisfied in the future, for example because insolvency proceedings seem inevitable, does the assumption of an intention to disadvantage creditors suggest itself. The same applies to the opponent's knowledge of the debtor's intention to disadvantage creditors, which the senate clarified in the third official guideline of its decision.

In addition, the senate stated that the debtor's intent to disadvantage creditors cannot generally be based on a mere threat of insolvency at the time of the challenged legal act. Rather, there must be additional circumstances, for example if, in the certain expectation of the occurrence of insolvency, a targeted satisfaction of certain creditors close to the debtor takes place outside the ordinary course of business. In practice, we still see today - after the reform in 2017 - that (out-of-court) challenges to insolvency are declared against a creditor (opponent of the challenge) merely on the grounds that the opponent of the challenge is aware of a "crisis of the debtor" from a comparatively small recurring delay in payment. In future, the insolvency administrators or their party representatives must be more precise here. As a rule, knowledge of "a crisis" is not sufficient. Although this should actually already be clear after the amendment to the law in 2017 for congruent acts of coverage. What is new, however, is that the threat of insolvency (which in practice is only the second option for justifying a claim if proof of the date of insolvency is retrospectively not possible) should no longer be sufficient on its own for incongruent cover. In these cases it will be necessary in future that "in the certain expectation of the occurrence of insolvency, specific (possibly close) old creditors are specifically satisfied with the available funds outside the ordinary course of business". If one reads this requirement and at the same time has an eye on the history of case law on section 133 German Insolvency Code, the question inevitably arises as to whether this might not be a requirement for some kind of "unfair" action on the part of the debtor. The legislative understanding of the concept of unfairness in section 142 German Insolvency Code reveals a certain similarity of the requirements, even if the IX Civil Senate apparently did not want to reintroduce the term "unfair".

It is still the case that a declaration by the debtor that he cannot pay for lack of liquid funds carries considerable weight when examining the cessation of payments and the knowledge of the opponent. The fact that some debtors use this assertion partly as a negotiating tool and are actually "only" unwilling to pay is still hardly heard in the case law regarding challenge of transactions. In these cases, the recipients of the payment must continue to expect a challenge of intent (up to four years after receipt of the payment), even if they had a justified (congruent) claim to the payment (e.g. because they delivered goods). In these cases, a payment settlement in accordance with a cash transaction under section 142 German Insolvency Code is all the more important.

With the last (sixth) official guideline, the senate makes it clear that insolvency once established on a certain reference date is no longer to be irrevocable. Admittedly, the case law continues to be upheld, according to which the continuation of the cessation of payments once it has occurred is to be presumed. However, the focus of the examination should be more on the extent of the established insolvency, especially when it comes to the knowledge of the opposing party. The decision that the "strength and duration of the presumption" depend on the extent of the established cessation of payments opens up new scope for the factual assessment of the existing indications. It is important to make use of it.

Does the ruling increase legal certainty? No.

Does the judgement open up more room for negotiation for more appropriate results in individual cases? Yes.

With this judgement, the IX. Civil Senate of the Federal Supreme Court sets the course for the future applicability of the challenge of transactions for intent. In doing so, it provides a guideline for the assessment of the facts by the judges pursuant to Section 286 German Civil Procedure Code. It is being hoped that the courts of instance will "courageously" use their discretion in the form of weighting the existing circumstantial evidence to ensure appropriate decisions. The same applies to all party representatives, who can take into account the particularities of the individual case through proper examination and, if necessary, through reasonable settlement agreements. It is also likely to play a role that the burden of presentation and proof for the actual circumstances required beyond the recognised insolvency lies with the insolvency administrator. After all, in practice the burden of presentation and proof determines whether a case is won or lost.