The Austrian Supreme Court has recently found that insolvency related avoidance claims can be sold. This may open a whole new business segment and will most certainly have a material impact on defendants in avoidance proceedings.
Assignability of insolvency related avoidance claims
In the case at hand (OGH 17 Ob 6/19k) an Austrian limited liability company concluded a purchase agreement on the sale of three properties (the "Purchase Agreement") to the wife of the company's de facto managing director in July 2015. Just over a year later, in October 2016, insolvency proceedings were initiated over the company's assets.
The insolvency administrator sold and assigned all claims under or in connection with the Purchase Agreement to an unrelated third-party buyer, with the purchase price amounting to EUR 5,000. In October 2017, the buyer challenged the Purchase Agreement under the Austrian Insolvency Act (Section 28 (3); intention to discriminate) and claimed EUR 471,745.27 from the managing director's wife. This amount is the difference between the purchase price paid under the Purchase Agreement and the real value of the properties. The buyer argued that the insolvency administrator had validly assigned all rights "under or in connection with the Purchase Agreement", which included the insolvency related avoidance claims in question.
Following an extensive analysis of the relevant legal writing and despite vast legal writing to the contrary, the Austrian Supreme Court found that the insolvency related avoidance claims had been validly assigned to the claimant. Regarding the significant difference between the purchase price paid and the real value of the properties, the Supreme Court stated that an appropriate purchase price is not necessary for a valid assignment. Rather, assignments are only invalid if they can be qualified as abuse of the administrator's rights or contradict the purpose of the insolvency proceedings, which must be assessed ex ante and evident for the assignee.
Rise of a new business segment?
Following this decision, insolvency administrators might start selling uncertain and/or high-risk avoidance claims – maybe even by creating avoidance-claim-portfolios – to investors who specialise in servicing such claims and are therefore able to litigate more cost-efficiently. Insolvency administrators will most likely choose to sell and assign their avoidance claims in situations where the insolvency estate does not contain enough funding to finance avoidance actions. By doing so, insolvency administrators will be able to monetise at least some of their avoidance claims which they would not have brought to court by themselves and decrease the length of insolvency proceedings.
Potential increase of avoidance actions
Such a development could lead to a situation where potential addressees of avoidance claims would increasingly face investors as potential claimants instead of insolvency administrators. These investors might service the purchased avoidance claims far more vehemently than an insolvency administrator and show less willingness to settle.
To secure and retain the insolvency estate, insolvency administrators are entitled to special avoidance claims. These allow them to challenge acts taken by insolvent debtors prior to the opening of the insolvency proceedings. The Austrian Supreme Court has recently found that such insolvency related avoidance claims can be sold and assigned by insolvency administrators within ongoing insolvency proceedings. An appropriate purchase price is not necessary for a valid assignment. Rather, assignments are only invalid if they can be qualified as abuse of the administrator's rights or contradict the purpose of the insolvency proceedings, which must be assessed ex ante and evident for the assignee.
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.