Defending against claims arising from insolvency challenges

In simple terms, the insolvency administrator can usually file a challenge if a person or company has received payments and was aware that the payer was having payment difficulties. If the payer then later files for insolvency, the recipients of payments are threatened with a challenge. The insolvency administrator concludes from circumstantial evidence that the payer was already on the brink of insolvency and the payee knew this. High levels of arrears on payment and subsequent instalment payment agreements, for example, are deemed to constitute such circumstantial evidence. One thing must be borne in mind here: Only a few companies file for insolvency in time. It is therefore not unlikely that a company that is actually already actual insolvent is actively operating in the market and has a business relationship with you. Based on their own business relationship with a customer (high levels of arrears, frequent reminders, closure of the customer's account and switching to advance payment, etc.), businesspersons often know so much about their customer that they are vulnerable to the threat of challenges in the event of the customer's insolvency. A challenge to insolvency can be directed against every creditor - including employees and shareholders.

The primary objective of an insolvency challenge is to satisfy the creditors. In insolvency proceedings, the assets available are not sufficient to satisfy all creditors. Therefore, the insolvency administrator assumes the task of joint realisation of the assets. After completion of the realisation, the creditors receive a so-called quota, i.e. a percentage of their claim. Exceptions to this include creditors who have security interests. They are assigned priority. Challenge claims are also part of the assets to be realised. Challenge claims therefore have the purpose of obtaining more assets that can be distributed to the creditors.

• Congruence challenges

If you have received a payment from your customer who, according to your knowledge, was already obviously having payment difficulties at that time, and an insolvency petition is filed within three months after the payment, you usually have to return the payment to the insolvency administrator. An exception applies in particular if a maximum of three to four weeks have passed between the customer's payment and your performance (e.g. delivery of goods).

• Incongruence challenges

If you have initiated compulsory enforcement against your customer on the basis of a title (e.g. a judgment or writ of execution) and received a payment and an application for insolvency is then filed within three months of the payment, you must generally refund the payment to the insolvency administrator. The same applies if your customer grants you different collateral or satisfaction than you are able to demand under the contractual agreement (e.g. transfer of ownership of a machine instead of payment or transfer of ownership as collateral for the claim to payment).

• Challenges based on direct prejudice to creditors 

This can occur, for example, if your client enters into an agreement with you that is highly disadvantageous for the client and you are aware that it places other creditors at a disadvantage. In actual practice, these cases are rather rare.

• Challenges based on wilful prejudice

This is very similar to the congruence challenge, but is possible for a period of up to four years and in some cases up to ten years. Due to the long period, large sums of claims can accumulate. A challenge with wilful prejudice is a frequently occurring challenge in actual practice. The notion of wilful prejudice to creditors is so broad that it covers almost every payment made by a company that is experiencing payment difficulties. If the recipient of the payment is aware of these payment difficulties, grounds for a challenge based on wilful prejudice are usually deemed to exist.

• Gift challenges

This is particularly dangerous for creditors. This is because a gift is also deemed to be the case if a third party (i.e. someone who himself would not have had to effect payment) pays you and the person actually liable to pay is already experiencing payment difficulties at that time. Payments of so-called fictitious profits may also be deemed to constitute a gift. A gift challenge can go back up to four years.

• Shareholder challenges

All payments on shareholder loans within the last year before an application for insolvency are contestable as a lump sum. Furthermore, many circumstances are treated as equivalent to a shareholder loan, so that any claim by a shareholder having a payment term of more than three months or any deferred claim is treated as a shareholder loan. Even if a shareholder provides security for a bank loan (e.g. a guarantee or land charge on his private property as collateral) and the company (partially) repays the loan, this leads to a claim against the shareholder.

The insolvency administrator is obliged to check whether challenge claims exist. In particular, the insolvency administrator will investigate whether the company had already been experiencing payment difficulties for some time prior to the insolvency application and whether individual creditors were aware of the payment difficulties. The insolvency administrator will also investigate other challenge constellations. If the preconditions for challenges are met, the insolvency administrator will demand the return of payments received from the relevant creditors. If creditors do not reimburse these payments, the insolvency administrator will file an action for reimbursement. In the event that creditors reimburse the payments, they can file for this amount as a claim in the insolvency proceedings. This is how creditors may receive back part of the amounts they have previously paid.