A broader view of insolvency

Yes, beware German liquidators, but also be aware of the range of their rights and responsibilities 

While we agree with the view of Stephan Weber (Life in the Bust Lane, The Lawyer, 17 June) that you should be warned upon receipt of a letter from a German liquidator, we believe his article needs to be put into the context of the German insolvency regime.

The central responsibility of the liquidator – or, more accurately, the insolvency administrator, as his task is not always just the winding up of the company – is to manage the assets and ensure their optimum realisation.

Within the scope of his duties, in which he is liable to all parties involved, he needs to ensure the assets are not diminished at the expense of the creditors. He has the right and duty to challenge transactions (mainly payments or other settlements) if they are close to the opening of the insolvency procedure or to the detriment of the other creditors.

Legal transactions that can be challenged are:

  • payments or other settlements to a creditor within three months before the opening of the insolvency proceedings if the debtor was illiquid at the time of the payment and the creditor had knowledge of such illiquidity; 
  • if the creditor was not or not yet entitled to receiving the kind of consideration he received, for example, advance settlement of claims or set-off a) within a month before the opening of the insolvency proceedings, any payments or other settlements, b) up to three months before the opening of the proceedings if the debtor was illiquid or c) up to three months before the opening of the proceedings the creditors knew the payment was detrimental to the other creditors;
  • any legal actions up to 10 years before the opening of the insolvency proceedings with the intention of disadvantaging the other creditors and when the other party knew about such intention;
  • gifts within four years before the opening of the procedure; and
  • shareholder loans.

With these claims, the insolvency administrator is able to reverse unjustified shifts in the assets from the pre-insolvency period. This right to reverse certain legal activities derives from the principle of equal treatment of creditors within German insolvency procedures (‘par conditio creditorum’) – no creditor has preferential treatment. With this principle in mind the prerequisites under which the administrator may claim such a reversal are viewed in an economic rather than a legal sense and decided on a case-by-case basis.

Although it may be disappointing when the administrator claims repayment the creditor still has the right to file and have it entered into the list of creditors. 

If neither the administrator nor one of the other creditors raises an objection to the claim it is considered as accepted and entered into the list of creditors. 

This has the legal status of a final judgment. The creditor will receive the same quota as any other creditor who was not lucky enough to get paid before the insolvency proceedings were opened.