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Insight

Insolvency challenges: Risks for suppliers and business partners

When payments received can be reclaimed and how companies can prepare their defence.

| Reading time 7 min. | Author: Johannes Egelhof LL.M.

According to section 129 of the Insolvency Code (InsO), the insolvency administrator can contest legal actions taken before the start of proceedings that harm creditors. In this context, the settlement of an existing and due claim may also be subject to challenge. According to section 130 of the Insolvency Code (InsO), congruent payments made in the three months prior to the insolvency petition being filed are voidable if the debtor was insolvent at the time and the recipient was aware of this. Non-congruent payments are also voidable under section 131 of the Insolvency Code (InsO), even if they were made within the last month, without the need to prove knowledge. Voidability on the grounds of intent under section 133 of the Insolvency Code (InsO) may extend back up to ten years. The recipient must return the amount received to the insolvency estate in accordance with section 143 InsO. In return, their own claim is revived in accordance with section 144 InsO. In contrast, section 142 of the Insolvency Code (InsO) protects the direct exchange of equivalent performances in ordinary supply relationships through the 'cash transaction' provision.

Why can payments received lawfully be reclaimed?

Under insolvency law, the primary issue is not whether the recipient was entitled to payment. Rather, the decisive factor is whether they received payment shortly before the insolvency proceedings commenced, whilst other creditors were left empty-handed. Challenging such payments then restores equal treatment.

Under section 143 of the Insolvency Act (InsO), the recipient must, in principle, return the amount received to the insolvency estate. Their original claim is revived in accordance with section 144 InsO and may be lodged in the schedule of claims. In economic terms, they will then generally receive only the insolvency dividend.

In principle, the claim for restitution does not constitute an allegation of criminal or dishonest conduct. Many grounds for a claim do not require fault. In others, it depends on knowledge of the insolvency or the intention to disadvantage creditors. This distinction must be maintained during the assessment.

What is congruent satisfaction?

A congruent payment occurs when a creditor receives security or satisfaction to which they were entitled in that form and at that time. A typical example is the transfer of a due invoice to the agreed account.

Under section 130 of the Insolvency Act (InsO), such a payment may be voidable, in particular, if it was made within the last three months prior to the application for insolvency or after the application was filed, and the debtor was insolvent. In addition, the recipient must have been aware of the insolvency or the application for the opening of insolvency proceedings. Knowledge is deemed to exist where there is knowledge of circumstances that inevitably lead to such a conclusion.

Mere payment after the due date is not sufficient. Nor do individual reminders, late payments or general industry problems, taken in isolation, prove knowledge of insolvency. However, the overall circumstances may paint a clear picture, for example where significant arrears have been accumulating over a prolonged period, enforcement proceedings have failed and the debtor has expressly stated that they are unable to meet their due liabilities.

What is incongruent cover?

A satisfaction or security is deemed incongruent if the creditor could not have demanded it, or could not have demanded it in that form, or could not have demanded it at that time. Examples include security provided retrospectively without an original claim, the transfer of unusual assets in lieu of performance, or a payment that is only secured through significant enforcement pressure in a form not originally owed.

Section 131 of the Insolvency Code (InsO) treats such transactions more strictly. Legal acts carried out in the month immediately preceding the insolvency petition or after the petition may be voidable without the need for additional proof of knowledge. Further conditions apply to the second and third months preceding the petition.

Companies should therefore exercise caution with regard to customers in financial difficulty if they seek to improve their position in the short term through new security, atypical payment methods or unagreed transfers of assets. What appears to be a commercial success may be more vulnerable to challenge under insolvency law than an ordinary payment.

When does the right to set aside a transaction on the grounds of intent apply?

The action to set aside transactions on the grounds of intent under section 133 of the Insolvency Act (InsO) covers legal acts carried out by the debtor with the intent to disadvantage creditors, provided that the other party is aware of this intent. The general time limit may be ten years. In the case of security measures and satisfaction of claims, the law reduces this period to four years in certain key circumstances.

The long time limit often leads to particularly high claims. The subjective requirements must therefore not be replaced by mere circumstantial evidence. Insolvency or suspension of payments may be important indicators. These must be accompanied by circumstances from which the debtor’s intent to disadvantage creditors and the recipient’s knowledge of this intent can be inferred.

Since the reform of the right to set aside transactions and in accordance with recent case law, a mere request for payment by instalments is not automatically sufficient. The decisive factor is whether the debtor is recognisably only experiencing a temporary liquidity problem or whether they are permanently unable to meet their due liabilities as a whole. The duration, amount and development of the arrears also play a role.

What are the implications of insolvency for the setting aside of transactions?

Insolvency is a legally defined state. According to section 17 of the Insolvency Code (InsO), it exists when the debtor is unable to meet their payment obligations as they fall due. In practice, it is assessed on the basis of a liquidity balance sheet and short-term developments. Suspension of payments may serve as a factual indication.

The insolvency administrator often reconstructs the situation retrospectively using accounting records, bank accounts, enforcement proceedings and outstanding items. The party against whom the avoidance action is brought, on the other hand, only sees their own part of the business relationship. They must therefore distinguish between objective insolvency and their knowledge of it.

A defence can be mounted at both levels. If the debtor was not insolvent at the time of payment, a claim based on section 130 of the Insolvency Code (InsO) lacks a key prerequisite. If the debtor was insolvent, the recipient may nevertheless lack the necessary knowledge.

What is the significance of reminders, instalment payments and enforcement measures?

Firstly, payment reminders merely document that a debt has not been paid on time. Multiple stages of reminders, a pattern of broken payment promises and mounting arrears, together with other factors, may indicate a deeper crisis. An instalment payment agreement is also not, in itself, automatic evidence of invalidity. Its terms and the communication at the time of conclusion are crucial.

The situation becomes critical if the debtor states that they are generally unable to meet their due obligations, can only pay individual, particularly urgent creditors, or require a comprehensive deferral of payment. If agreed instalments are repeatedly missed, the picture becomes clearer.

Enforcement measures may lead to inconsistent evidence of payment or provide indications of knowledge. On the other hand, not every payment obtained under enforcement pressure must automatically be repaid. The timeframe and the facts of the case must be examined in detail.

Does a cash transaction provide protection against avoidance?

A cash transaction under section 142 of the Insolvency Code (InsO) protects an immediate exchange of services of equal value. If a business partner supplies goods or a service and receives the agreed consideration promptly, the estate is not economically diminished in a one-sided manner.

This protection requires a close temporal and economic connection. Long payment terms, accrued outstanding debts or subsequent set-offs may call the direct exchange into question. Furthermore, the consideration must be of equivalent value.

Even a cash transaction is not absolutely unassailable. In cases of deliberate preference of creditors, the protection only applies if the recipient did not realise that the debtor was acting in bad faith. In ordinary supply relationships, however, a cash transaction remains a key line of defence and, at the same time, a tool for limiting risk during a customer crisis.

What are the rules regarding direct debits, set-off and payments made by third parties?

In the case of direct debits, it depends on when the payment is deemed to have been effected under insolvency law and whether it could still be revoked. The exact method of payment may therefore be decisive for the time limit for challenging the payment and its allocation.

Set-off arrangements are protected or restricted by sections 94 et seq. of the Insolvency Code (InsO). A set-off arrangement that already existed prior to the commencement of proceedings may be maintained. If it is created in a manner that is open to challenge, or brought about after the commencement of insolvency proceedings through an impermissible arrangement, the set-off may be excluded.

Payments made by shareholders, affiliated companies or other third parties are also not automatically secure. It must be examined from whose assets the payment originates, whether the insolvency estate is affected and whether the debtor was entitled to a claim for reimbursement or compensation.

How should companies respond to a letter of objection?

The initial letter often contains a legal assessment and a payment deadline, but does not always set out all the facts. The recipient should neither pay hastily nor reject the claim outright. First, the amount claimed, individual payments, payment dates, the underlying insolvency application and the facts alleged must be examined.

The following documents are required: invoices, bank statements, reminder correspondence, instalment agreements, meeting notes, proof of delivery and internal credit decisions. The level of knowledge at the time is crucial. Subsequent information regarding the actual extent of the crisis must not be factored into the assessment retrospectively.

Subsequently, the insolvency administrator should be asked to provide a clear and comprehensible account of the objective insolvency and the alleged knowledge thereof. Depending on the case, a full defence, a partial settlement or an economic agreement may be appropriate. The limitation period and any suspension thereof due to negotiations must be taken into account.

How can a supplier minimise the risk of a claim at an early stage?

In the case of customers showing signs of financial distress, the business relationship should not be managed solely by the sales department. Credit limits, payment terms, security and delivery authorisations require a consistent legal and commercial approach. New deliveries against prepayment or as part of a close exchange of services can limit the risk more effectively than simply accumulating further outstanding receivables.

It should be documented why continuing the relationship appeared economically justifiable. This may include up-to-date payment information, agreements that have been honoured, confirmed financing or robust restructuring measures. An internal file that merely collects warning signs without recording positive developments may later paint a distorted picture.

Unusual forms of security and selective payments should be scrutinised before they are accepted. The best form of security is not always the one that is legally the most secure. The aim is to structure matters in such a way that business operations continue without unnecessarily facilitating a subsequent challenge.

About the author

Johannes Egelhof
Johannes Egelhof LL.M.
Partner · M&A & Company Law
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Johannes Egelhof, LL.M., advises suppliers, business partners and insolvency practitioners on the avoidance of insolvency transactions and crisis management. He combines an analysis under insolvency law with a commercial strategy for defence, settlement and future terms of supply.

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Frequently asked questions about challenging insolvency proceedings

Yes. Even the payment of a claim that is due may be contestable if it is made within a relevant period and the statutory conditions – in particular those relating to insolvency and knowledge – are met.

No. It is merely one possible indicator. The decisive factors are the reason, the content, whether instalments have been paid on time, the amount of arrears and further information about the financial situation.

The time period depends on the circumstances of the case. Actions to set aside transactions on the grounds of lack of coverage often relate to the final months prior to the insolvency petition. Actions to set aside transactions on the grounds of intent may extend significantly further back in time; in the case of payments and security arrangements, they typically cover a period of up to four years.

A cash transaction is the immediate exchange of services of equal value. Prompt delivery in return for prompt payment may therefore be afforded special protection, whilst long-standing arrears or extended payment terms may weaken that protection.

He must set out and prove the conditions for the grounds for avoidance that he is invoking. Depending on the claim, these include objective insolvency and the required level of knowledge on the part of the payee.

If the amount received is repaid, the original claim is revived in accordance with the Insolvency Code and may, in principle, be lodged in the insolvency schedule.

Not without verification. Payments, time periods, the legal basis, evidence of knowledge and any potential objections relating to cash transactions should be reconstructed on the basis of the documents available at the time.

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