Knowledge of insolvency in German exchange transactions

Background

The German Federal Court of Justice has constrained the scope of facts that can be used against a debtor by a creditor when making restitution claims.

Under German law, a debtor’s knowledge of their (potential) insolvency can be used as a fact proving the debtor’s intention to discriminate against other creditors. In practice, this has led to an abusive use of restitution claims by creditors, due to the excessive reach of this presumption.

Held

The ruling reduces the significance of the knowledge of insolvency in cases where the debtor has made a payment on the justified assumption that they will receive a benefit in exchange. However, the Court did not define a justified assumption, nor did it state whether the benefit received must be equal in value to the payment made, giving rise to new uncertainties.

Equivalence in value is not a requirement to prove intentional discrimination, but it can be used as evidence depending on the overall merits of the case. The language of the decision hints that restitution from the creditor is limited to the extent of the expected benefit.

Summary

The decision protects debtors and creditors who transact with debtors from restitution claims. However, due to the remaining uncertainties, it is still preferable to seek protection under the cash transaction doctrine. Whether the decision contributes to a general trend towards a more creditor-friendly practice remains to be seen.

BGH v. 18.7.2019 – IX ZR 258/18

Tobias Rhode