Background

Under German insolvency law, employees are generally protected from claw-back claims. The payment of wages is considered a "cash transaction" if the employer pays the salary within three months of the work being performed. A “cash transaction” can only be contested in limited circumstances. Where a third party pays the salary, the cash transaction privilege remains if it is not clear to the employee that a third party made the payment (s.142(2) and s.3 InsO).

A recent German Federal Court of Justice ruling shows that this protection has limits.

Decision

A gift cannot be considered part of a cash transaction. If the payment of salary by a third party is a gift under s.134 InsO, the payment is not covered by the cash transaction privilege and can be reclaimed if the third party becomes insolvent.

The court also argued that it cannot be assumed that the legislator intended s.142(2) and s.3 InsO to be applied to an insolvent third party.

Comment

While this decision limits employees' protection from claw-back claims, the court noted that employees are only required to return payments they have been enriched by (s.143 (2) and s.1 InsO). It is possible for employees to argue that they have not been enriched if they used the remuneration for general living expenses and could not have met the expenses by other means.

Find out more

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.