Cash-flow insolvency

In a recent judgment, the German Federal Court of Justice (Bundesgerichtshof) took the opportunity to clarify its position on sec. 17(2) German Insolvency Act (Insolvenzordnung, InsO). According to sec. 17(2) InsO a debtor is deemed insolvent if he is unable to pay his debts as they fall due (Zahlungsunfähigkeit).

In previous case-law, the Bundesgerichtshof assumed that a debtor was not insolvent if he was only

temporarily unable to pay his debts (Zahlungsstockung). The Bundesgerichtshof required that the debtor was able to gain the necessary financial means to pay at least 90 percent of his mature debts within three weeks. This led some lower courts and practitioners to false conclusions: to establish whether a person or company was insolvent they compared the debts that were due on a specific date with the financial means which the person or company had on that date plus the estimated incoming payments for the next three weeks.

What the Bundesgerichtshof has now made clear is that one has to take into account not only the debts which were due at the beginning of the three weeks period but also the debts which become due during that period.

The clarifying judgment is to be welcomed as sec. 17(2) InsO plays a pivotal role in German insolvency proceedings and directors’ liability cases.

Bundesgerichtshof, 19 December 2017, II ZR 88/16