Reform of German Avoidance Provisions

Smoothing out the rough edges of “willful disadvantage”

A recent reform of the German Insolvency Statute (Insolvenzordnung, InsO) has relaxed the avoidance provision against so-called “willful disadvantage” (§ 133 InsO).

Under the willful disadvantage provision, a transaction is voidable if it was made by the debtor (a) within ten years prior the request to open insolvency proceedings; (b) with the intention to disadvantage his creditors and (c) whilst the other party was aware of his intention. Moreover, such awareness is presumed in case the other party knew of the debtor’s imminent insolvency, and that the transaction constituted a disadvantage for the creditors.

The German legislature has now added a number of exceptions to that rule (new paragraphs 2 and 3) applicable to transactions by which the debtor performs an obligation or grants a security interest. For example, such transactions shall now only be voidable if made within four years prior to the insolvency filing. In addition, transactions constituting willful disadvantage now benefit from the so-called cash transactions exception (which protects payments in return for equitable consideration, see § 142 InsO) unless the counterpart recognizes that the debtor has acted in bad faith.

Gillis Lindemans

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