As the festive season approaches, it is time to take stock of the three 2023 most important decisions of the German Federal Court of Justice (Bundesgerichtshof, BGH) on claw-back issues in insolvency. In 2023, the BGH had to deal with very different issues that are relevant for multiple situations and stakeholders, specifically (1) lenders in restructuring transactions, who hold shares in a debtor or implement a debt-for-equity-swap (summing up of shareholdings of lenders under a syndicated loan agreement), (2) supply relationship creditors (claw-back for ‘wilful disadvantage’ in ‘executory contracts’), and (3) factoring banks (liability of bank under claw back provisions requires knowledge of circumstances by the bank itself and not only the seller).
Shareholdings and syndicated lending – risk of subordination of claims, e.g. following a (partial) debt-for-equity-swap
In restructuring situations, lenders who take equity (e.g. in a debt-for-equity-swap) – even if it is a very small stake far below 10% – and remain or become lenders in a financing syndicate may not be allowed to rely on a claw-back exemption.
In January 2023, the BGH decided that claims by lenders who (1) own an equity stake in a company (even if only 10% or less) and (2) are part of a syndicate of lenders may be subordinated in insolvency proceedings of the debtor. The decisive factor, according to the BGH, is whether the lender exercised ‘exuberant entrepreneurial responsibility’ (überschießende unternehmerische Verantwortung). The underlying facts of the case involved a debtor where the shareholders provided a financing with commitments corresponding to the respective share in the share capital. The finance documents oblige them to make such financing available. They also had shared security and had agreed on a waterfall and turnover mechanism.
In restructuring situations, lenders who take equity (e.g. in a debt-for-equity-swap) – even if it is a very small stake far below 10% – and remain or become lenders in a financing syndicate may not be allowed to rely on a claw-back exemption. This exemption exists for ‘small shareholders’ (shareholdings up to 10% of the share capital). However, if the aggregate share of all syndicated lenders exceeds 10% of the debtor’s share capital, such lenders are subordinated in German insolvency proceedings. This means that these lenders will only be paid after the claims of all unsecured creditors have been satisfied in full. Moreover, any such repayments made within one year prior to the insolvency petition or thereafter as well as security taken within ten years prior to the insolvency petition or thereafter are voidable.
The decision underlines the importance of risk mitigators in German restructuring situations that involve a (partial) debt-for-equity-swap. The ‘restructuring privilege’ (i.e. the non-subordination of shareholder loans) for lenders who take equity in order to support the restructuring is only available until and when the debtor is ‘sustainably restructured’ (a regrettably vaguely-defined point in time). In practice, appropriate risk mitigators are e.g., either trust structures or (tailormade) profit linked instruments in the holding structure of the debtor.
‘Executory contracts’ – Successful claw-back based on ‘wilful disadvantage’ does not require knowledge of the fact that the debtor will not be able to pay all of its creditors in the future
Contractual counterparties of executory contracts should bear in mind that the rules on claw-back for ‘wilful disadvantage’ contain a presumption of the requirement of the creditor’s knowledge of such ‘wilful disadvantage’. Pre-conditions are (1) the debtor’s imminent illiquidity and (2) that the creditor had knowledge thereof and of the fact that the relevant transaction would be detrimental to other creditors.
Likewise in January 2023, the BGH had to decide a case relating to claw-back for ‘wilful disadvantage’ of creditors. The decision follows a number of decisions in 2021 and 2022, where the BGH revised its judicial practice in relation to claw-back for wilful disadvantage (see our briefing dated 3 January 2023, German only).
German insolvency law provides that transactions made to the detriment of creditors within up to ten years prior to the insolvency petition or thereafter are voidable if they were entered into by the debtor (1) with the ‘intent’ to disadvantage its creditors (‘wilful disadvantage’) and (2) the other party to the transaction (i.e. the creditor) had knowledge of such intent. Back in 2021, the BGH stated that for the creditor to meet the criteria of knowledge of the wilful disadvantage it is not sufficient that the creditor knows of the debtor’s actual cash-flow insolvency, rather the creditor must be aware that the debtor will in fact not be able to satisfy its debt in the future.
If the debtor is imminently cash-flow insolvent (i.e. not able to pay its debt falling due within the next 24 months) and the creditor was aware of this and the fact that the transaction would be detrimental to all creditors, German insolvency law provides for a presumption of the creditor’s knowledge of the wilful disadvantage. The BGH now confirmed that this presumption is (1) still applicable and (2) does not require the creditor being aware of the fact that the debtor will not be able to pay all of its creditors in the future.
The decision is highly relevant to contractual counterparties in ‘executory contracts’, particularly when being involved in early discussions about a restructuring. Payments on outstanding claims received while the debtor is imminently cash-flow insolvent might become voidable in subsequent insolvency proceedings. Creditors should, therefore, continuously develop strategies to manage insolvency risks of their contractual counterparties.
Factoring banks – generally, no liability for a factoring bank which itself does not have knowledge of the circumstances forming the basis of claw-back
An insolvency administrator is not successful with a claw-back action against a factoring bank which itself does not have knowledge of the relevant circumstances forming the basis of claw-back provided that the seller of the claim (having such knowledge) (1) assists the bank in the collection process only on the basis of standard clauses in the factoring contracts, and (2) has not passed the relevant information to the bank.
Another interesting decision in 2023 concerns factoring banks. Standard terms and conditions of factoring banks usually contain clauses that oblige the seller of the claim to assist the bank in the claim collection process. Sellers generally have to provide information and documentation relating to the respective debtor and make the factoring bank aware of facts indicating a potential cash-flow insolvency and other circumstances that could impede the collection of the claims. However, the seller usually does not have a mandate to collect and enforce the claim on behalf of the factoring bank. The factoring bank itself usually collects the claims. Payments to the factoring bank are subject to claw-back risk if the relevant pre-conditions are met.
The BGH clarified that the factoring bank cannot be held liable for knowledge that the seller might have in relation to circumstances relevant for claw-back in insolvency. The factoring bank itself needs to be in possession of such knowledge (e.g. cash-flow insolvency of the debtor, or ‘wilful disadvantage’ as described above). The BGH clarified that the seller generally is not acting on behalf of the bank but only assisting in the collection process.
As long as the seller has not passed the relevant information and the bank does not have knowledge of the relevant facts, this is good news for factoring banks. It facilitates their ordinary financing practice and reduces certain claw-back risks.
For information, these are the case citations:
- BGH 26 January 2023 – IX ZR 85/21 (shareholdings and syndicated lending)
- BGH 12 January 2023 – IX ZR 71/22 (‘executory contracts’)
- BGH 25 May 2023 – IX ZR 116/21 (factoring banks)
If you would like to discuss any of the issues raised in this blog further, please do not hesitate to reach out.