On 29 September the German federal government has presented a draft act to improve legal certainty in relation to contestations pursuant to the Insolvency Act and the Contestations Act (Gesetz zur Verbesserung der Rechtssicherheit bei Anfechtungen nach der Insolvenzordnung und nach dem Anfechtungsgesetz). The draft aims at affording to creditors more certainty that they will not have to repay any amounts received from a debtor, even if such debtor falls bankrupt in the future.

The focus of the proposals is on the contestation of transactions made by the debtor with the intention to disadvantage other creditors. Currently, the insolvency administrator is entitled to contest such transactions, if they occurred during the last ten years prior to, or after, the application for insolvency proceedings and if the beneficiary of the transaction was aware of the debtor's intention to disadvantage other creditors. Such awareness is presumed by operation of law, if the creditor knows of the imminent insolvency of the debtor. An equivalent right is afforded under the Contestation Act to creditors, whose foreclosure measures against a debtor are futile. In the draft act the government now proposes to limit these contestation rights in various respects where the concerned transaction is a so-called covering transaction by which a security or satisfaction is granted to the creditor or is facilitated:

• The period to contest covering transactions is envisaged to be shortened to four years. The ten years' period shall continue to apply only to other transactions such as unfair property movements or similar measures.
• Where a covering transaction was congruent, the awareness by the creditor of the debtor's intention to disadvantage other creditors is proposed to only be presumed, if the creditor was aware that the debtor was actually insolvent. The awareness of the debtor's imminent insolvency shall no longer suffice to trigger a respective presumption. A congruent covering transaction means that the creditor was entitled to the respective security or satisfaction in the manner and at the time it has been provided.
• A presumption shall be introduced that the creditor was not aware of the debtor's insolvency in cases where the creditor has facilitated payment by the debtor, e.g., by allowing the debtor a deferral of payments or payment by instalments. Thus, the burden of proof of the creditor's awareness will be shifted to the insolvency administrator (or in the context of the Contestations Act, the contesting party).
• The principle of privileged treatment of cash transactions, set forth in the Insolvency Act, is envisaged to also apply to the contestation of transactions made by the debtor with the intention to disadvantage other creditors. Pursuant to the government's proposals, transactions in return for which the debtor promptly received an equivalent consideration (i.e., a cash transaction), shall only be contestable, if the debtor has acted unfairly and the creditor has been aware thereof. Currently, the cash transaction privilege applies only to other types of contestations, but not to contestations based on the debtor's intention to disadvantage creditors. In this context it is planned to further define when the consideration has been promptly received by the debtor. For the benefit of employees, it is in particular planned, to provide that the requirement of promptness is met, if the period between the performance of the work of an employee and the payment of the remuneration does not exceed three months.

A further limitation on the right to contest concerns so-called incongruent covering transactions, where the creditor was not entitled to the security or satisfaction in the manner and at the time it was provided. Such incongruent transactions are contestable by the insolvency administrator if they occurred during the last month or, under certain circumstances, the last three months prior to the application for insolvency proceedings. In the draft act it is now clarified that foreclosure measures or transactions to prevent foreclosure measures do not per se constitute an incongruent covering transaction, as is the current view in German case law. By means of this amendment the government aims at protecting creditors, who merely exercise a statutory right without being aware of the insolvency of the debtor, against the risk of contestation.

Further amendments concern the reinforcement of the rights of creditors to apply for insolvency proceedings and the interest accrual on contestation claims.

The amendments shall enter into force on the day after its publication in the Federal Law Gazette (Bundesgesetzblatt). Before it needs to be adopted by the German parliament (Bundestag) and issued by the federal president (Bundespräsident). The amended provisions are envisaged to also apply to all transactions which occurred prior to the date on which the new legislation enters into force, if the corresponding insolvency proceedings or, respectively, legal action pursuant to the Contestation Act are commenced on or after this date.

Further details and the draft act are available in the German language on the web pages of the Federal Ministry of Justice and Consumer Protection. If you have any queries or would like to discuss this topic in more detail, Christine Oppenhoff will be happy to assist.