The German Federal Court of Justice (Bundesgerichtshof) has clarified the conditions under which incongruent collateral, granted when an insolvency is imminent, can be contested. The burden of proof is placed on the defendant creditor to demonstrate that the action was part of a serious restructuring attempt.

Background

The debtor, a model railway manufacturer, granted its creditor banks additional collateral for existing working capital lines that deviated from the original credit terms. The additional collateral was provided in reliance on an ultimately failed reorganisation attempt.

Decision

The Federal Court of Justice ruled that the granting of incongruent collateral (ie, a payment or other benefit that a creditor is not entitled to under the original terms of their agreement) in the event of impending insolvency is a strong indication of the debtor's intention to disadvantage creditors. The intention can be refuted if there is a serious reorganisation plan based on a sound concept and the incongruent cover is based on trust in the effectiveness of the reorganisation. The creditor bears the burden of proof that the contested measure was part of a serious reorganisation attempt.

Key Takeaways

This judgment strengthens the position of the insolvency administrator in the context of the contestability of incongruent cover. It underlines the creditor's burden of proof regarding the prospects of success of restructuring efforts. Creditors should ensure, therefore, that reorganisation attempts are well documented, realistic and based on a viable reorganisation plan in order to prevent avoidance.

Bundesgerichtshof, 18 January 2024, IX ZR 6/22.

Find out more

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