Bankruptcy legislation in Germany (Insolvenzordnung): contesting debtor transactions (Insolvenzanfechtung)

A brief introduction

This article examines the legal mechanism for challenging transactions entered into by an insolvent debtor. It sets out the grounds for challenging such transactions and the legal nature of each, the time limits for challenging them and the limitation periods, as well as the legal consequences of a transaction being declared void following a challenge by the insolvency administrator.

Keywords: bankruptcy, bankruptcy estate, recovery of assets, declaration of a transaction as void, debtor acting in bad faith, challenging a debtor’s transactions, creditor, suspicious transaction, preferential transaction, void transaction, voidable transaction, voidable contract, consequences of declaring transactions void, harm caused to creditors

The legal framework for challenging transactions

Current insolvency legislation serves to protect the body of creditors by providing them with a variety of legal tools to safeguard their rights and legitimate interests in insolvency proceedings. The most effective means of protecting creditors’ rights in this regard is to challenge transactions entered into by an insolvent debtor in accordance with sections 129 et seq. of the Insolvency Code (InsO).

In particular, transactions may be subject to challenge where payments were made from the debtor’s assets shortly before the declaration of insolvency, as a result of which the body of creditors may have been prejudiced in their right to satisfy their financial claims against the debtor.

The institution of challenging the debtor’s transactions is designed to safeguard the interests and maintain the balance in the relationship between the debtor and their creditors, by allowing transactions to be declared void and the debtor’s assets to be returned for redistribution in favour of the entire body of creditors.

What is a congruent or incongruent transaction? (Kongruente oder inkongruente Deckung)

If the payment or service received by the creditor corresponds to the agreements reached with the debtor, this is referred to as a ‘congruent transaction’. If, however, the payment or service is provided in a manner other than that described in the agreements between the creditor and the debtor, this is referred to as an ‘incongruent transaction’.

An example of an incongruent transaction is therefore where a creditor receives a guarantee or payment in a form or at a time not provided for in the prior agreements. Incongruent transactions are more likely to be challenged by the insolvency administrator on the grounds of their ‘suspicious nature’.

How does the protective mechanism for a cash transaction (Bargeschäft) work?

A so-called cash transaction is generally referred to where the service provided by the creditor was of equivalent value to the payment made and was provided within a reasonable timeframe, typically within 30 days. In such cases, according to Section 142 of the Insolvency Regulations and case law, there is no indication of harm to creditors’ property rights, as the debtor was provided with a service of equivalent value. However, in the case of a so-called ‘disproportionate transaction’, the protective function ceases to apply and the transaction is subject to challenge.

What is a transaction entered into with the intention of prejudicing creditors’ rights (Vorsatzanfechtung)?

Transactions entered into through an abuse of rights, fictitious transactions or sham transactions, carried out with the intention of causing harm to creditors’ property rights, are subject to challenge under Section 133 of the Insolvency Regulations for a period of up to four years prior to the filing of the bankruptcy petition. In this context, the contesting of a transaction presupposes an intention to cause harm to the debtor’s assets and, consequently, an intention to infringe the rights of creditors.

Such a transaction, carried out with the intention of causing harm, may also be challenged in cases of so-called cash transactions in accordance with Article 142 of the Insolvency Regulations. However, in such cases, it is also necessary to prove the element of intent to cause harm to the creditors’ property rights.

What are the limitation periods and the consequences of a transaction being declared void?

The right to challenge a transaction is, as a rule, subject to a limitation period of three years from the date on which the insolvency administrator receives information regarding the facts giving rise to the challenge, but no later than 10 years after the transaction was concluded. By its very nature, the mechanism for challenging transactions is designed to facilitate the recovery of assets in relation to transactions entered into, as a rule, shortly before the commencement of bankruptcy proceedings. The further back in time the transaction lies, the stricter the requirements for the grounds for challenging it and the greater the burden of proof on the insolvency practitioner in the context of the transaction challenge proceedings.

What are the consequences of a transaction being declared void?

If a transaction is successfully challenged, the amount received must be returned to the estate; if the recipient was aware of the grounds for challenging the transaction, interest must also be paid. The purpose of challenging a transaction is to rectify a situation arising from a potential diminution of the estate to the detriment of the body of creditors.