Insolvency avoidance — effective strategies for creditors entitled to separate satisfaction

Creditors should take preventative measures to avoid disadvantages in the event of an insolvency challenge by drafting contracts accordingly.

In combination with other measures, creditors entitled to separate satisfaction can protect their claims from being seized by the insolvency administrator.

The industrial heartlands of our republic are flickering. One of the crown jewels of the German economy, the VW Group, is announcing the previously unimaginable to an astonished public: plant closures! Bad figures are piling up everywhere, and all indicators give little reason to hope that the situation will improve soon. The only pressing question is how long the deep recession will last. In 2024, Creditreform registered around 22,400 corporate insolvencies. Compared to the previous year, this represents an increase of almost 30% and is also the highest level since 2015. Creditreform currently states that the level of insolvencies in 2025 will be significantly higher than the previous year and could even reach the levels of the global financial crisis — around 32,000 insolvencies in 2009/2010 — in some cases

At the same time, the number and scope of insolvency challenges have risen sharply. In an interview in August 2024, Karsten Kiesel from the law firm Schultze & Braun reported that “the number and scope of insolvency avoidances has increased very sharply in the last ten years”. Legal experts attribute this to statutory extensions to the contestation periods and facts that have been added to the German Insolvency Code (InsO), which have expanded the administrators’ scope of action.

But what is an insolvency challenge?

Insolvency avoidance is a legal instrument in German insolvency law. It is used to reverse legal acts that were carried out prior to insolvency so that the entirety of the creditors of a company that has become insolvent are not disadvantaged in favor of individual creditors. Insolvency avoidance allows the insolvency administrator to contest payments, transfers or other dispositions of assets that were made prior to the opening of insolvency proceedings and reclaim the assets in order to make them available for the equal satisfaction of all creditors.

With the introduction of the Insolvency Code in 1999, the insolvency administrator’s right to contest insolvency proceedings was extended and tightened compared to the previous Bankruptcy Code. The aim of this measure was, among other things, to increase the number of proceedings opened and to enable liquidation in insolvency proceedings — particularly with regard to the restructuring and reorganization of the insolvent debtor. This means that creditors can also be obliged to reimburse payments that they have received from their debtors a long time ago as part of the insolvency proceedings. The principle of equal treatment of all creditors is thus brought forward to a point in time prior to the occurrence of insolvency. In the last three months before filing for insolvency, insolvency administrators can enforce repayment claims comparatively easily.

It is undeniable that this legal option is used intensively by insolvency administrators, not least with regard to their fees. In this context, it is often claimed that creditors benefit from this after the proceedings have been concluded, as the reorganized and restructured company remains as a customer. In practice, however, this is often not the case: The insolvent company is often brought back onto the market with a new business model as part of a change management process.

Many creditors feel that insolvency avoidance is unfair, as in certain circumstances they are forced to return payments or collateral they have already received, even though they accepted them in good faith. This is perceived as expropriation. The protection of property rights was and is a cornerstone of a functioning society.

The main reasons why insolvency avoidance is perceived as unfair are:

First: Reclaiming payments already received

Many creditors may have waited a long time for payments and made considerable efforts to collect their debts. When these payments are then contested and they have to pay the money back, they feel penalized, even though they have simply enforced their right to payment. This can be particularly upsetting if the payments were made a long time before the debtor became insolvent.

Secondly: Long contestation periods

The avoidance in insolvency can extend to legal acts that took place several years ago. For example, avoidance for intentional prejudice to creditors (Section 133 InsO) allows payments made up to ten years before the insolvency application to be reclaimed. These long periods of time make it difficult for creditors to assess the legality of a payment or to take suitable precautionary measures.

Thirdly: Uncertainty and legal uncertainty

The possibility of insolvency avoidance leads to constant uncertainty for creditors as to whether they can actually keep payments or collateral received. This uncertainty can put a strain on business relationships and cause additional administrative work, as creditors must constantly monitor the solvency of their business partners.

Fourth: Particularly harsh impact on smaller creditors

Smaller creditors, such as small and medium-sized enterprises (SMEs), are often particularly affected. For them, a clawback can threaten their existence as they may not have sufficient liquidity to repay amounts received. Larger creditors or banks usually have more financial resources and better legal advice to deal with such situations.

Fifth, disproportionality

Another argument against insolvency avoidance, which is perceived as unfair, is that it often appears disproportionate. A creditor who has received a payment due in good faith could be forced to repay it even though he could not see any signs of the debtor’s impending insolvency. From the point of view of the creditors concerned, it is unfair to be “punished” retrospectively for decisions that were made under normal business conditions.

Sixth: Costs and effort of recovery

If a challenge is successful, the creditor must repay the amount received, which is often associated with considerable costs and additional effort. In addition, the creditor may have already paid taxes on the payment received, which are now difficult to reclaim, or they may have already settled their own liabilities from the funds received.

Seventh: Lack of transparency and comprehensibility of the procedure

Many creditors find the procedure for contesting insolvency proceedings to be complex and non-transparent. The legal basis and requirements for a contestation are often difficult to understand for legal laypersons. The use of specialist lawyers, who generally charge on an hourly basis, is expensive and reinforces the feeling of being treated unfairly because creditors cannot always understand why a challenge against them was successful.

The insolvency administrator must observe certain deadlines set out in the German Insolvency Code (InsO) when contesting insolvency. These deadlines relate both to the period within which a challenge is possible and to the date by which an action for avoidance must be brought. The most important deadlines and regulations that the insolvency administrator must comply with are listed below:

How are the deadlines for contesting insolvency regulated?

First: Contestation periods in accordance with the Insolvency Code (insO)

The avoidance provisions in the Insolvency Code (InsO) are linked to certain periods of time prior to the opening of insolvency proceedings. These periods determine which actions can be contested. The most important deadlines and regulations are

§ Section 130 InsO (congruent coverage): Payments or benefits received by a creditor in the form to which he is entitled can be contested if they were made within the last three months prior to the insolvency application and the creditor was aware of the debtor’s inability to pay.
§ Section 131 InsO (incongruent cover): Payments or benefits to which a creditor was not entitled in the agreed form are contestable if they were made within the last three months prior to the insolvency application, within the last month or after the application. The shorter the period before the application is filed, the lower the requirements for the creditor’s knowledge of the debtor’s inability to pay.
§ Section 132 InsO (Immediately after filing for insolvency): Payments made after the application for insolvency has been filed but before the opening of insolvency proceedings can be contested if the creditor was aware of the debtor’s inability to pay.
§ Section 133 InsO (deliberate disadvantage): Legal acts performed up to ten years prior to the filing of the insolvency petition are voidable if they were performed with the intention of disadvantaging the creditors and the recipient was aware of this intention.
§ Section 134 InsO (gratuitous payments): Gratuitous payments made within the last four years prior to the opening of insolvency proceedings are contestable.

Second: Time limit for filing the action for annulment

The insolvency administrator must file an action for avoidance within certain deadlines after the insolvency proceedings have been opened. The main deadlines are

Three-year limitation period (Section 146 InsO): The claim for restitution of a voidable performance is generally time-barred after three years. This period begins with the opening of insolvency proceedings. This means that the insolvency administrator must assert the avoidance within three years of the opening of insolvency proceedings.
Knowledge-dependent limitation period: However, the three-year limitation period only begins to run when the insolvency administrator has or should have become aware of the circumstances justifying the claim. This means that the period does not begin before the insolvency administrator is aware of the facts that justify the avoidance.
Maximum period of ten years (Section 146 (3) InsO): Irrespective of the insolvency administrator’s knowledge, avoidance claims expire at the latest ten years after they arise, i.e. generally ten years after the contested act.

Thirdly: Special deadlines and time periods for contestation

Summary proceedings: In some cases, particularly where there is a threat of loss of assets, the insolvency administrator can apply for an interim injunction in order to secure the contested assets quickly. However, such summary proceedings are subject to special time limits, which are usually very short (usually a few weeks or months).
Consideration of objection deadlines: If the insolvency administrator asserts the avoidance in writing and the opposing party objects, the statutory deadlines for the objection or defense in the court proceedings must be taken into account.

Creditors can assume that the insolvency appeals conducted by the administrators are largely legally watertight. Lawsuits, on the other hand, are time-consuming and cost-intensive and are difficult for small to medium-sized companies to manage. The insolvency administrator has the upper hand and can apply for and receive legal aid for the insolvent company he is administering. As a rule, you can say: even if it is difficult, forget it.

What legal options does the creditor have?

Above all, creditors can take preventative action to at least reduce future insolvency losses. In order to defend themselves against insolvency challenges, they must provide their lawyers with the necessary “tools”.

There are currently only two foreseeable preventative measures to minimize the damage of an insolvency challenge. Large companies that are advised by specialist lawyers and auditors are already using these options. These measures can be perceived as harsh, especially in long-standing business relationships, but the legislator offers no alternatives. Ultimately, the aim is to limit the damage to your own company as much as possible.

Renouncing helpfulness and goodwill: Creditors can no longer afford to be generous, as there is a risk that this will end up costing them dearly. As soon as creditors find out about their customer’s or tenant’s problems, they should terminate the business relationship immediately — even at the risk of this leading to insolvency.

Collateral through pledges of rights

Creditors can try to secure themselves with pledges of rights to reduce the risk of recovery. One tried and tested method is for creditors to pledge their debtors’ company shares in the case of larger claims. In the event of impending insolvency, pledging shares gives the creditor a stronger negotiating position vis-à-vis other creditors or the insolvency administrator. The creditor can thus proactively intervene in the proceedings and possibly avert the costs of insolvency proceedings.

It is worth noting that the cost of insolvency proceedings in Germany is one of the lowest in the EU. By pledging company shares, the creditor can secure an advantageous position, as he is given preference over unsecured creditors. Another advantage is that, according to a ruling by the Federal Court of Justice (BGH), Section 166 (1) of the German Insolvency Code (InsO) does not apply in such cases.

This gives the creditor the opportunity to acquire the company by way of a public auction in the event of a breach of the covenants stipulated in the pledge agreement. After the acquisition, the creditor gains access to all business documents and company transactions, can review the actions of the previous management and identify potential personal liability claims against the former management.

The legal structure of a pledge must be carried out properly and transparently. It is crucial that the pledge is formally correct and legally effective. A pledge that is not properly documented or registered could not only be ineffective, but could also be seen as an attempt to disadvantage other creditors, which could lead to a challenge. We can recommend experienced lawyers who can assist you in drafting such agreements.

This approach is well known to us from practice, as we are regularly commissioned with the realization of pledged company shares. Through a combination of such measures, creditors can significantly reduce the risk of an insolvency challenge. It is important to take action at an early stage, regularly check the creditworthiness of business partners and continuously optimize your own business practices and security mechanisms. In our videos “Firewall for securing receivables” and “Options for securing receivables — planning security in advance”, which are linked below, we discuss this important topic in detail.

Please contact us if you have a specific case for a public auction: To the contact form

We have provided an explanatory video to provide information about the assignment: To the explanatory video for clients

Information on the auction process: To the explanatory video for bidders