Avoidance in insolvency

It’s a common situation: A regular client or business associate suddenly falls into arrears. You don’t want to lose their custom, so you agree that they can pay in instalments, or make other arrangements regarding payment terms. In a situation like this, a supplier who continues to carry out work, despite payment arrears, for a customer who subsequently enters insolvency is exposing his or her business to an existential threat. Because when it comes to the crunch, the supplier will have to return payments previously made by the customer – over the last four years in the case of transactions providing security to or enabling the satisfaction of an insolvency creditor, and over the last ten years in the case of acts undertaken to intentionally prejudice creditors. This is because insolvency administrators for the contractual partner will try to recover payments previously made in order to protect the body of creditors as a whole.

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Why does the option of avoidance in insolvency exist?

Avoidance in insolvency allows the insolvency administrator to recover company assets, i.e. recoverable assets previously held by the debtor, or to reinstate the situation as it stood at the start of the crisis, as the case may be. He or she does this by, for example, reclaiming payments made by the debtor to contractors. The aim is to make these assets available to all creditors and to distribute them as provided in the Insolvency Code. This protects the body of creditors as a whole at the expense of individual creditors who previously benefited from preferential treatment by the debtor.


When do things get risky?

First, three basic questions:

  •     Are you maintaining ongoing relationships with entities who are financially vulnerable?
  •     Is it known that someone you do business with is having financial difficulties?
  •     Is it abundantly clear that a customer who is late with payment is unable to pay?


The checklist:

Specific warning signs that a contractual partner/debtor is experiencing difficulties:

  •     Failure to fulfil promises to pay
  •     Failure to make instalment payments
  •     Direct debits are returned
  •     Payments are made by a debtor of the contractual partner, bypassing the debtor

Conversely, in the case of suppliers:

  •     Constant demands for payment
  •     Threats to stop supplying the customer
  •     Compulsory enforcement

How can businesses protect themselves?

Schultze & Braun recommends:

1. If you notice any of the situations described in the checklist in your supplier/customer relationships, it is important to seek advice as soon as possible.<br/> ► The specialists at Schultze & Braun will carry out a risk assessment, create a safeguarding plan, and take suitable steps to minimise the risk.

2. Agree retention of title arrangements in good time.<br/> ► This will safeguard products delivered. However: Retention of title rights are only useful if payment is made promptly.

3. Insure against the risks of avoidance.<br/> ► Insurance should be taken out in good time before occurrence of an event.


Dr. Pascal Schütze
Rechtsanwalt (Attorney at Law), Fachanwalt für Bau- und Architektenrecht (Certified Specialist in Building Law and Architectural Law)


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