Reforms To German Insolvency Code Avoidance Action Provisions

Author:Jones Day
Profession:Jones Day

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...

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