In a judgment of November 29, 2007 that is of particular
interest to financial institutions involved in asset-based
lending, the German Federal Supreme Court
(Bundesgerichtshof) allayed concerns that a global
assignment (Globalzession)—the assignment of
all existing and future trade receivables to a lender to secure
loans—would not survive the insolvency of the
respective originator.1 This decision was eagerly
awaited because various judgments of German Higher Regional
Courts (Oberlandesgerichte) had raised concerns lately
that the security interest over receivables created in the last
three months before the insolvency application of the
originator could easily be set aside by an insolvency
administrator and thus become unenforceable. A set-aside was
deemed possible if the receivables were created in the last
month before the originator's insolvency application
or the receivables were created in the second and
third month before the insolvency application and (i) the
originator was unable to settle its due liabilities at the
time, or (ii) the lender was aware that the assignment would
disadvantage other creditors.
This meant that the most recent and generally most valuable
trade receivables, specifically the ones created in the last
month prior to the insolvency application, were no longer part
of the collateral. A further cause for concern was that the
other popular form of "revolving" security interest
in Germany—the transfer of ownership by way of
security of current and future goods stored in a warehouse
Warenlagers)—would have been subject to the same
set-aside. German banks had taken the view in official press
releases that these Higher Regional Court judgments seriously
impair their ability to finance Mittelstand companies
and called for a change in the law in the event that the
Federal Supreme Court upheld this jurisdiction.
In its recent judgment, the Federal Supreme Court discarded
this jurisdiction by the Higher Regional Courts. As was
expected, the court has not ruled out a set-aside entirely, but
the requirements will be much more difficult to meet. The
security interest over trade receivables created in the
critical three-month period prior to the application can, as a
rule, only be set aside if the originator was unable to settle
its due liabilities at the time and the lender was
aware of this fact.
The main advantages for secured lenders are that the
security over receivables created during the last month prior
to the application cannot just be set aside without any further
(substantial) requirements and that only security rights over
trade receivables created after the lender became aware of the
originator's inability to pay will be affected by any
set-aside. Once lenders know of the originator's
inability to pay, they can take appropriate action to secure
1. The full text of the decision was not yet available
at the time this Commentary was written. The
Commentary is based on a press release published by
the press office of the Federal Supreme Court.
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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Under Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR")...
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