Welcome to the August edition of the R&I Update.

Also in this edition:

• English court makes largest ever wrongful trading award against former BHS directors.
• Rising tide of winding-up petitions against Chinese property developers.
• The clash of insolvency and arbitration: Salford Estates overturned.

In a recent decision, the Federal Court of Justice (BGH) determined that the release from a surety obligation is generally not contestable if the debtor fulfils the principal debt secured by the surety.

Background

The guarantor had guaranteed the debtor's liability to the bank. This liability was repaid by the debtor prior to insolvency. The insolvency administrator made an avoidance claim against the guarantor because he had been released from his guarantee obligation.

Decision

The BGH rejected the avoidance claim in connection with the guarantee obligation for the following reasons:

• The guarantor was not a recipient of an avoidable performance. The prerequisite for avoidance is that the asset belongs to the assets of the insolvent debtor for distribution to creditors. The purpose of insolvency avoidance is not to provide creditors with benefits from assets that would not otherwise be available.
• Liability of the guarantor did not arise from the point of view of the "double effect" of a contestation. A double effect (where the insolvency administrator can choose which beneficiary to claim against) only exists in the case of a joint and several debt relationship, not between the principal debtor and guarantor. A double effect cannot be justified by the fact that the guarantor's claim for indemnification against the debtor has been fulfilled by the payment to the creditor. 

Key Takeaways

The BGH clarified that the release of a guarantor from a guarantee obligation through the fulfilment of a principal claim is generally not contestable. The decision provides valuable guidance for the assessment of contestability in other cases in which the release from an obligation is based on the debtor's payment to a third party.

Find out more

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