Restructuring & Insolvency

The Federal Court of Justice's 11th Senate (BGH, 20 July 2010, XI ZR 236/07) recently explained obiter dictum how banks can make direct debit payments (Zahlung per Einzugsermächtigungslastschrift) more insolvency proof. Following this judgement, banks may now want to change their general terms and conditions accordingly. Further, the 11th Senate ruled on conditions of implicit approval of debits in the direct debiting system by the debtor. The 9th Senate, responsible for insolvency law, supports the 11th Senate's view on both issues.

By judgement of 20 September 2010 the Federal Court of Justice held that in a letter of comfort (Patronatserklärung) it would be possible to validly agree a termination right for the parent company which could be exercised even in a financial crisis of the beneficiary of such letter of comfort (BGH, 20 September 2010, II ZR 296/08).

The Higher Regional Court of Hamburg (OLG Hamburg, 25 June 2010, 11 U 133/06) ruled that the business continuation prognosis according to § 19 (2) of the German Insolvency Code is based only on the view of a prudent director at the time of assessment. Subsequent findings concerning the director's assessment made on such a basis do not give rise to any liability of the director. In addition, the court held that in exceptional circumstances a director may have more than three weeks after the company has become illiquid or over-indebted to conclude restructuring efforts.

By two decisions of April and June 2010 the Federal Court of Justice further consolidated its case law on the requirements for challenging payments made to creditors not by the debtor itself but a third party (BGH, 27 April 2010, IX ZR 122/09 and BGH, 17 June 2010, IX ZR 186/08).

The German laws on challenging third-party payments as "gratuitous benefits" become particularly relevant for bank creditors when restructuring group financings. In this situation, proposed third party payments by German members of a group should be checked as to whether they may be challenged as a gratuitous benefit.

In a judgement of April 2010, the Federal Court of Justice (BGH, 22 April 2010, IX ZR 8/07) confirmed its established case law that an assignment of future receivables does not cover claims arising after opening of insolvency proceedings.

To avoid double payments, scheduled payments to creditors (and other transactions) should be reviewed by debtors as soon as the actual creditor or a predecessor creditor becomes insolvent.

The Federal Court of Justice (BGH, 22 April 2010, IX ZR 208/08) ruled that an insolvency administrator – when realising movable assets which are subject to a security interest – has no duty to notify the secured creditor a second time before the administrator may sell the assets to a third party for a price better than the offer previously made by the secured creditor.

When realising movable assets, the insolvency administrator is not obliged to start a competition between an interested purchaser and the secured creditor. Following the notification of an envisaged sale, secured creditors should therefore carefully consider the option to offer the takeover of the assets below value.

The US Bankruptcy Court for the Eastern District of Virginia (Supplemental order of 19 Nov 2009, Case No. 09-14766-RGM) held that § 103 German Insolvency Code granting the insolvency administrator the right to elect non-performance of executory contracts should enjoy priority over the US rule for executory contracts in § 365 US Bankruptcy Code which grants the contract parties certain rights to executory contracts.

In German insolvency proceedings, rights under executory contracts (including licence rights to intellectual property) may be elected to be non-performed by the German insolvency administrator even if the bankruptcy laws of the country in which the licencee is located provide other rules for executory contracts.