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German courts are coming down on the side of liquidators when interpreting the Insolvency Act
Around this time last year I got a letter from a liquidator informing me that one of our customers in Germany had gone insolvent. These are difficult times, so unfortunately it was not the first time we had lost a customer in that way.
When I checked with colleagues, the fact the customer had gone insolvent was not news to them. In fact, it happened in 2009 although we had not done business with the company since. But the liquidator was asking us to return payments made back in 2008.
Section 130 para.1 InsO (German Insolvency Act of 5 October 1994 as amended) allows the liquidator to reclaim any payment “if it was made during the last three months prior to the request to open insolvency proceedings if the debtor was illiquid on the date of the transaction and if the creditor was aware of his insolvency on this date”.
Whether the debtor was illiquid at the time is an objective test. In our case, the liquidator could show outstanding invoices totalling around 500,000 (£426,000) when the customer made the payment to us, so that test was met. In addition, there is a subjective element in that the creditor must have had knowledge of the illiquidity.
We did not know about any of the other creditors, nor had the customer hinted at liquidity problems. So, we did not have the required knowledge and this was surely a clear-cut case. I replied to the liquidator with a confident letter (one of those you regret writing, especially when it is read back to you in court). I did not get a reply and thought that was the end of the matter.
Until, at the end of last year, just before the statutory limitation period expired, I heard again from the liquidator. When we still refuse to pay up, he brings a claim. What has he to lose?
According to the Section 130 para2 InsO, “awareness of circumstances pointing directly to insolvency or to a request to open insolvency proceedings shall be considered equivalent to awareness of insolvency or of the request to open insolvency proceedings.” Well, we did not know of any such circumstances. Or that’s what I thought.
IHS operates on payment terms of 30 days. When the customer did not meet the payment date we sent a reminder. And a second. The customer ended up paying just short of two months after the due date. Such a delay is in no way unique in the present climate, and yet the local court in Frankfurt/Main held that it is. According to the judgment, the late payment showed a lack of liquidity so we are deemed to have known the customer was insolvent. What other reason would there have been for the customer not to pay on time? Well…
Would it have made a difference if the customer had paid after the first reminder? Maybe. But generally the German courts are increasingly interpreting the Insolvency Act in favour of the liquidator. So be warned when you receive a letter from a German liquidator.
IHS is a global publisher and information provider. The full text of the German Insolvency Act is available in English at www.gesetze-im-internet.de/englisch_inso/