GERMANY TRENDS AND DEVELOPMENTS Contributed by: Carsten Loll, Otto von Gruben, Torsten Volkholz, Frank Grell and Sebastian von Hornung, Latham & Watkins
Right of choice of the insolvency administrator
Further grounds for claw-back (Sections 133 and 134, InsO) Further, but less relevant, grounds for claw-back are covered in Sections 133 and 134 of InsO. With respect to Section 133 of InsO, a claw-back risk exists for any transaction intended to inten - tionally harm creditors within up to ten years before filing for insolvency if the creditor knew about the debtor’s intent. In the case of congru - ency (ie, a transaction is fulfilled as contractu - ally agreed), knowledge is irrefutably presumed if creditor knew that debtor was unable to pay its debt when it was due and that the transaction was detrimental to the (other) creditors. Still, the German Federal Court of Justice recently tightened the requirements for prov - ing the debtor’s intent to disadvantage credi - tors. In practice, proving the debtor’s malicious intent is now significantly harder for the insol - vency administrator. As an example, the credi - tor would have to know that the transaction will lead directly to insolvency and the correspond - ing debtor’s intention, given that the seller lacks sufficient funds to continue its business or to be liquidated. As for Section 134 of InsO, a claw-back risk exists for any gratuitous performance by the debtor within up to four years before filing for insolven - cy. No gratuitousness exists if (i) the debtor’s performance is counterbalanced by a compen - satory consideration, and (ii) performance and consideration are interdependent. The objective comparison of the values exchanged generally determines whether adequate consideration exists. Only sale (far) below market value would constitute gratuitous performance.
This section explains the most important grounds for claw-back and their legal consequences, and the so-called right of choice of the insolvency administrator. With a mutual contract, the insolvency admin - istrator may choose if it wants to fulfil the con - tract, if the debtor and the other party have not fulfilled the contract at all or in full at the time of commencement of the insolvency proceedings (Section 103, InsO). If the insolvency administrator refuses perfor - mance, damages for non-performance are only unsecured claims in the insolvency. An exception applies to real estate: If a priority notice of conveyance ( Auflassungsvormerkung ) is registered with the relevant land register, a creditor may demand satisfaction of its claim from the insolvency estate. In such a case, due to the secured position of the creditor, Section 103 of InsO does not apply (Section 106, InsO). Even so, the claw-back of the secured claim or of the priority notice of conveyance is still possi - ble. Mitigation measures are therefore essential. Potential Third-Party Claims Third-party claims in a real estate insolvency scenario would likely stem from Section 826 of the German Civil Code (BGB) – ie, the allegation that creditors have been impaired in an uncon - scionable manner or contrary to public policy ( sittenwidrig ). The investor or the debtor may be liable under Section 826 of the BGB if the sale of the debtor or assets of the debtor was made in such a manner, thereby impairing other credi - tors.
300 CHAMBERS.COM
Powered by FlippingBook