In February 2017, the German legislature enacted reforms
designed to improve procedures governing the avoidance of
pre-insolvency transfers and to encourage work-outs between debtors
and creditors. Under the Insolvency Code, an insolvency trustee (or
the supervisor in a debtor-in-possession proceeding) has the power
to avoid and recover: (i) preferential transfers made during the
three months prior to the petition date; (ii) transfers made with
the intent to defraud creditors during the 10 years prior to the
petition date, if the transferee had knowledge of the debtor's
intent or is deemed to have constructive knowledge of fraudulent
intent because it was aware of the debtor's anticipated
cash-flow insolvency and the fact that the transfer would harm
creditors; (iii) transfers made for no consideration during the
four years prior to the petition date; (iv) shareholder loan
repayments made during the year prior to the petition date; and (v)
certain transfers made subsequent to the petition date but before
the formal commencement of insolvency proceedings.
The reform amends, among other things, the fraudulent transfer
provisions in the Insolvency Code by reducing to four years the
longest-possible avoidance look-back period of 10 years (applicable
to "claw-back" of transfers made by a debtor with the
intent to harm creditors), provided that such four-year period
applies in those instances where the transfer resulted in a
fulfillment of the transferee's claim or the securing of such
claim. It also changes the rules governing the circumstances under
which a transferee will be deemed to have knowledge of the
debtor-transferor's insolvency, especially in cases where the
transferee has agreed to modified payment terms on a loan or
extension of credit or with respect to the delivery of goods and
services made before an agreement as to the modified payment terms
was reached. In addition, the reform amends the Insolvency Code to
require that, if a contemporaneous exchange for new value is
challenged as a fraudulent transfer, the transferee must have had
knowledge at the time of the transfer of the debtor's
"dishonesty" as well as the debtor's insolvency and
its intention to cause harm to creditors.
According to the legislative history, the amendment is intended
to obligate the administrator to prove—as was required prior
to 2003—that the debtor and the transferee actively colluded
to remove assets from the reach of creditors or that the transferee
had knowledge of the debtor's intent to do so.
Finally, section 143 of the Insolvency Code was amended to
provide that interest accrues on a monetary avoidance judgment only
after the transferee defaults on paying the judgment. Previously,
interest began to accrue on the filing date of the avoidance
litigation and became payable if the insolvency administrator
prevailed in the litigation.
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