German Insolvency Law: Group Payments (Sometimes Maybe) Not Per Se Voidable?

Author:Ms Christine Borries (née Ede) and Markus Huber
Profession:Hogan Lovells
 
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Germany has notoriously broad voidability laws. As a rule of thumb, any payment by a third party has high voidability risks if the third party has no obligation to make the payment under the contract. Such payments qualify as incongruent (3 months hardening period, very few further requirements) and often qualify as gratuitous (4 years hardening period, without any further requirements). A recent decision of the German High Court has stirred hope that the Court may give some leeway to cash pool payments by group companies. However, on a closer look at the decision, it becomes clear that the boundaries for an exemption from voidability were set very narrowly.

Comment on the German High Court decision dated 12. September 2019 (file no.: IX ZR 16/18) by Christine Borries, LL.M. (Sydney) and Dr. Markus Huber, lawyers of the German Hogan Lovells insolvency and restructuring practice.

General rule: Voidability of third party payments due to incongruence or lack of consideration

If a creditor receives payment not from his contractual counterpart but from one of its affiliated group companies, such payment is incongruent unless the creditor had a contractual payment claim against the entity making the payment. Incongruence means that someone has received something in a way he had no legal claim to (section 131 InsO). Hence, if and to the extent such payment was not owed by the third-party payer, such third-party payment is incongruent. The hardening period is three months (meaning that the payment can be challenged if made in the three months preceding the payer's insolvency).

Further, if at the time of the payment the actual debtor was already in a state of (impending) illiquidity, the German High Court considers such third party payments as gratuitous. The Court argues that the creditor wouldn't have been able to economically enforce its claim against its original debtor anymore. Hence, by receiving payment from a third party the creditor does not lose a valuable claim against the original debtor, but receives something without consideration. In this case, the hardening period is four years.

The worst part for creditors in this is that under German statutory law, they have no right to refuse a third party payment.

A glimmer of hope: third-party payment neither incongruent nor gratuitous in case of a number of years of punctual payments by the same pool leader

In the case now decided by the German High Court, the third-party payment was made on...

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