BGH Changes Course on Intent to Disadvantage Creditors

The BGH intent to disadvantage creditors judgment in brief

With the BGH intent to disadvantage creditors judgment of 6 May 2021 – IX ZR 72/20, the Federal Court of Justice changed course on insolvency contestation for intentional disadvantage of creditors under § 133 of the Insolvency Code (Insolvenzordnung, InsO). Under its earlier case law, the debtor's intent to disadvantage creditors was practically presumed once the debtor knew it was illiquid, and the counterparty's knowledge of that intent was inferred from its knowledge of the illiquidity.

The judgment raised the bar: knowledge of illiquidity alone is no longer sufficient. The debtor must also have known, or at least accepted, that it would not be able to satisfy its other creditors in full in the future, and the counterparty must have known this too.

For suppliers, lenders, landlords and other business partners of companies in financial difficulty, the decision was welcome news. Contestation under § 133 InsO can reach back up to ten years before the application to open insolvency proceedings, or four years for payments and security, and has long been insolvency administrators' most powerful tool to recover payments made by the debtor before the insolvency. The judgment did not abolish that risk, but it made it more difficult for administrators to rely on generic indicators such as late payments or knowledge of payment difficulties.

The facts

The case itself was small, and the amounts involved were modest by any standard. A limited company had failed to publish its annual financial statements, and the Federal Office of Justice imposed an administrative fine of EUR 2,500 plus fees. The company explained the delay with restructuring measures and asked for instalment payments after a telephone discussion about its economic situation. The Federal Office agreed, and the company paid nine instalments between June 2010 and March 2011 and further fees in 2012. Insolvency proceedings were opened in November 2015 on a creditor's application.

The insolvency administrator sought repayment of EUR 2,360.50 from the Federal Republic under § 133(1) InsO in the version applicable before 5 April 2017.

The local court and the Regional Court of Bonn, as appeal court, dismissed the claim, reasoning that the Federal Office had no knowledge of any intent to disadvantage creditors. The BGH set aside the appeal judgment on the administrator's appeal and remanded the case, because the appeal court's reasoning for denying knowledge was insufficient. More importantly, it used the case to restate the principles of § 133 InsO in six headnotes.

The new principles of the BGH intent to disadvantage creditors case law

The court's headnotes can be summarised as follows. First, the subjective requirements of contestation cannot be based solely on the fact that the debtor knowingly was illiquid at the time of the transaction. Second, where the debtor knew of its illiquidity, its intent to disadvantage creditors additionally requires that it knew, or at least accepted, that it would not be able to satisfy its other creditors in full in the future, judged by the objective circumstances known to it.

Third, for full proof of the counterparty's knowledge of that intent, the counterparty must additionally have known that the debtor would not be able to satisfy its other creditors in the future, again judged by the circumstances known to it.

Fourth, the debtor's intent can, as a rule, no longer be based on merely imminent illiquidity at the time of the transaction. Fifth, a particularly meaningful basis for finding that the debtor had stopped payments is its own declaration that it cannot pay for lack of liquid funds; absent such a declaration, other circumstances indicating a suspension of payments must carry comparable weight. Sixth, the strength and duration of the presumption that an established suspension of payments continues depends on how clearly the illiquidity became apparent, in particular from the counterparty's perspective.

The statutory framework after the 2017 reform

The judgment concerned § 133 InsO in its version before 5 April 2017, but its principles also apply to the current version. The 2017 reform of contestation law had already limited the provision in several respects.

Under § 133(2) InsO, the look-back period for transactions that granted the counterparty security or satisfaction is four years instead of ten. Under § 133(3) InsO, where the counterparty received security or satisfaction that it was entitled to in that form and at that time, its knowledge is presumed only if it knew of the debtor's actual illiquidity, not merely imminent illiquidity. And where the counterparty agreed a payment plan or granted other payment facilities, it is presumed that it did not know of the illiquidity at the time.

The BGH intent to disadvantage creditors judgment complemented these statutory changes by tightening the requirements for the subjective elements across the board. Together, they have reduced the scope for contestation of ordinary business transactions with distressed debtors. Illiquidity itself is defined in § 17 InsO: the debtor is unable to meet its payment obligations when due, which is generally presumed if it has stopped making payments.

Practical consequences for creditors

The decision changed the dynamics of contestation litigation. Administrators must now show more than late payments, reminders or knowledge of financial strain. They need evidence that the debtor knew that its creditors would not be satisfied in the future, for example because there was no realistic prospect of restructuring, and that the counterparty knew this as well. A creditor that knew of a serious restructuring attempt with reasonable prospects of success may be able to rebut the inference of knowledge.

Creditors should nevertheless remain cautious. Contestation risk still exists where a debtor openly declares that it cannot pay, where the counterparty receives information about the debtor's overall financial situation, or where it is a close business partner with insight into the debtor's affairs. Lenders and suppliers who are involved in restructuring negotiations should document the restructuring concept and the reasons for believing in its success, because this can be crucial to show that they did not know that the debtor would fail to satisfy its creditors. Under the Corporate Stabilisation and Restructuring Act (StaRUG) and in protective shield proceedings, additional rules protect certain transactions.

Typical scenarios after the BGH intent to disadvantage creditors case law

Most contestation claims under § 133 InsO arise from a few recurring situations. A supplier continues to deliver to a customer that pays late and receives payments on overdue invoices; a bank receives repayments or additional security during a crisis; a landlord or tax authority agrees instalments; a group company receives payments from a subsidiary that later becomes insolvent. Under the earlier case law, the administrator's task in these cases was often limited to showing that the creditor knew of payment difficulties. Since the BGH intent to disadvantage creditors judgment, the administrator must show that the creditor also knew that the debtor would not be able to satisfy its other creditors in future.

In the supplier scenario, factors such as the length of the business relationship, the information the supplier received about the customer's overall situation, the existence of a credible restructuring plan and the customer's own statements become decisive. A supplier that knew only of delays in its own invoices, without information about the debtor's other liabilities or prospects, is in a better position than one that was told the customer could no longer pay anyone.

For banks, the assessment often turns on what they knew from credit monitoring and restructuring negotiations. Intra-group payments remain particularly exposed because group companies typically have extensive knowledge of each other's financial situation, and § 133(4) InsO separately addresses contracts with related parties.

Contestation risk in restructuring negotiations

Creditors who participate in out-of-court restructurings face a dilemma: they need information to assess the plan, but that information may later be used to show that they knew of the debtor's situation. The BGH intent to disadvantage creditors judgment eases this tension. Where a restructuring concept exists that is based on a proper analysis of the debtor's situation and has reasonable prospects of success, and the parties begin to implement it, the debtor's intent and the counterparty's knowledge can be rebutted, even if illiquidity existed. Restructuring opinions prepared according to recognised standards, such as those commonly prepared by auditors, provide evidence of such a concept.

Formal tools offer additional protection. Under the StaRUG, transactions provided for in a confirmed restructuring plan are protected from contestation to a large extent, and in self-administration and protective shield proceedings, transactions with the involvement of the court-appointed monitor follow specific rules. Creditors financing a restructuring should consider whether a formal procedure better protects their payments and security than an informal arrangement.

Follow-up case law

The BGH has since applied and refined the principles in further decisions, for example on the significance of over-indebtedness as an indicator and on the counterparty's knowledge in long-term business relationships. The general direction remains: intent to disadvantage creditors requires a full assessment of the debtor's situation and expectations, and the counterparty's knowledge must be established on the basis of the circumstances actually known to it. Administrators have adapted their pleadings accordingly, and the outcome of contestation claims depends increasingly on the specific evidence of what the parties knew. For defendants, this means that internal records, such as credit committee minutes, sales notes and correspondence, should be reviewed early, because they often decide whether the required knowledge can be proven.

How TRW & Co helps

We advise creditors, suppliers, lenders and investors on insolvency contestation risks and defend them against claims by insolvency administrators. We also advise debtors and their managing directors on restructuring and on structuring transactions in a crisis to reduce contestation risk. Our work connects with our insolvency proceedings and StaRUG restructuring practices; see also our notes on contestation under § 133 InsO and supplier strategies in customer insolvencies. Please contact us to discuss your situation. This briefing is general information and not legal advice.