Silent Debtors Prove Their Illiquidity

We have had a critical view on insolvency contestations due to willful disadvantages several times (see last Insolvenzanfechtung – Reform der Insolvenzanfechtung beschlossen). A recent decision of the German Federal Court (decision dated 25 Februar 2016 – IX ZR 109/15) shows again that a reform to the provisions on the insolvency contestation of willfully disadvantageous transactions is indispensable.

The Guiding Principle…

The decision mentioned provides for the following guiding principle:

If a debtor, who owes a considerable amount of money, remains silent for a period of several months after receipt of invoices and reminders and offers payment (of the full amount in question, including costs and interest) by instalments in response to a collection order, default actions and court proceedings, the creditor will be deemed to know that the creditor, who has no need for a long period of analyzing the debt, stopped payments in general.

… and its Meaning

An insolvency contestation due to willful disadvantages can easily become a boomerang several years after a customer’s crisis had seemed to be solved. Who knows that his customer is faced with imminent illiquidity, has to consider that a contestation due to Sect. 133 of the German Insolvency Code may take place within the next ten years and can cause a full repayment of amounts received from his debtor. Such contestation requires that the debtor makes payments with the intention to disadvantage his creditors and the awareness of the receiving party of such intention. These merely subjective elements as inner circumstances, which cannot be proven easily, are typically deducted from objective elements. For the receiving creditor and his knowledge on the illiquidity of his creditor as well as on his creditor’s intention to disadvantage the other creditors, therefore, the following is applicable:

- If a debtors remains silent for several months after receipt of invoices and reminders, these circumstances, taken alone, justify to assume that the debtor stopped its payments in general.

- Who issues invoices and reminds of overdue amounts in close time periods, builds considerable pressure to pay and forces his debtor to a fast analysis of the debt in question. If the debtors remains silent under this pressure, his silence will indicate considerable liquidity problems.

- A solvent debtor will avoid any hopeless court proceedings and will, therefore, not lodge any appeal against a court order. An honest debtor will not let himself be sued without contesting the debt in question objectively, by only aiming to have the creditor agree on an instalment contract.

Overall, in such sitatuions, a creditor has to face the fact that the debtor has become insolvent. The creditor accepts that his payment causes disadvantages to the burden of other creditors. If the creditor receives payments due to the instalment contract, such payments can be contested in accordance with Sect. 133 of the German Insolvency Code.

Conclusion

According to the judgment of the German Federal Court, court settlements cannot hinder a contestation due to willful disadvantages. Although it is hard for creditors to say why their debtors remain silent, it is recommended waiting only a short period of time before initiating court proceedings. This may avoid insolvency contestations. Additionally, it needs to be considered that an instalment contract can only become helpful if it can be proven at a later stage that payments difficulties have not been the only reason for its conclusion. Looking at the indications suggested by the Federal Court, such proof is hard to produce. A correction by the legislator is, therefore, urgently needed.