Claw-back of Security in Insolvency

The following analysis is for informational purposes only and does not constitute
legal advice by HENGELER MUELLER Partnerschaft von Rechtsanwälten.

1. Introductory questions

1.1 Please briefly describe the main type of security in your jurisdiction (per type of
asset; per perfection technique; per type of secured obligation).

I. Security Interests in Property (Realsicherheiten) vs. Personal Security

Interests (Personalsicherheiten)

In German law, security interests are commonly divided into two main categories: security
interests in property and personal security interests.

a. Security Interests in Property (Realsicherheiten). Security interests in

property relate to a specific tangible or intangible asset of the security provider that shall
become liable for the secured debt. They include security interests with respect to the
following types of assets:

(i) Real Estate. A creditor may take security over real estate in the form of
a mortgage (Hypothek, Sections 1113 to 1190 of the German Civil Code (Bürgerliches
Gesetzbuch), the "BGB") or a land charge (Grundschuld, Sections 1191 to 1198
BGB). Other forms of security over real estate include rent charges (Rentenschuld,
Sections 1199 to 1203 BGB) and annuity land charges (Reallast, Sections 1105 to
1112 BGB).

(ii) Moveable Assets. Debt can also be secured by way of a transfer of title
for security purposes in respect of moveable assets where the security provider may (if
desired) retain possession of the assets (Sicherungsübereignung, Sections 929 sentence
1 and 930 BGB). German law also recognises retention of title arrangements
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(Eigentumsvorbehalt) by which the seller or supplier of a certain asset delivered to the

purchaser retains title to such asset until the purchase price has been paid (Section 449
BGB).

In addition, the creditor of a claim and the security provider may agree on the creation
of a pledge over the moveable asset in favour of the creditor (Pfandrecht an
beweglichen Sachen, Sections 1204 to 1259 BGB).

Specific provisions apply to security granted over ships and aircraft in the form of ship
mortgages (Schiffshypothek, Sections 24 to 81a of the Act on Rights over Registered
Ships and Ships under Construction) and registered liens on aircraft
(Registerpfandrecht an Luftfahrzeugen, Sections 1 to 74 of the Act on Rights in
Aircraft).

(iii) Intangible Assets. Intangible assets such as rights and claims can be
utilised as security either by way of a security assignment (Sicherungsabtretung,
Sections 398, 413 BGB) or by way of a pledge of rights (Pfandrecht an Rechten,
Sections 1273 to 1296 BGB).

b. Personal Security Interests (Personalsicherheiten). Personal security

interests are agreements by which a person promises the creditor of a third party to become
liable for the performance of the third party's obligation. Personal security interests may take
various forms, including a suretyship (Bürgschaft, Section 765 BGB), guarantee (Garantie),
additional assumption of debt (Schuldbeitritt) or abstract acknowledgement of debt
(abstraktes Schuldversprechen, Sections 780, 781 BGB).

II. Accessory Security vs. Non-Accessory Security

In German law, security interests are either accessory or non-accessory in nature. Accessory
security interests are closely linked to, and share the fate of, the underlying secured claim.
Consequently, accessory security interests do not come into existence without a valid secured
claim and cease to exist, by operation of law, as soon as the relevant secured claim has been
extinguished. Furthermore, accessory security interests will be automatically transferred
together with the underlying secured claim and cannot be separately transferred.

Non-accessory security interests, on the other hand, are independent of the underlying secured
claim. Consequently, they are more flexible from the perspective of the secured creditor. In
particular, the abstract nature of non-accessory security interests allows for their re-utilisation
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for purposes other than the original security purpose. Non-accessory security interests need to
be re-transferred or re-assigned to the relevant security provider and do not automatically
lapse upon extinguishment of the underlying secured claim.

Mortgages and pledges are accessory security interests, whereas assignments and transfers for
security purposes as well as land charges belong to the group of non-accessory security
interests.

III. Perfection Techniques

Different perfection requirements apply to the various forms of security interests. In all cases
where security is being granted on a consensual basis, the creditor and the security provider
need to enter into an agreement providing for the creation of the relevant security. Usually,
the relevant security agreement is not subject to a specific form requirement. Exceptions to
this general rule include the surety and the abstract acknowledgement of debt where the
declaration of the security provider must be made in writing (Sections 780, 781 and 766
BGB). The granting of pledges over shares held in a German limited liability company needs
to be notarised (Section 15 (3) of the German Limited Liability Companies Act in conjunction
with Section 1274 BGB).

Depending on the type of security being taken, additional requirements need to be met to
establish the relevant security interest: Security taken over real estate, including mortgages
and land charges, needs to be registered with the competent land register. Pledges over
moveable assets require transfer of possession in respect of the collateral to the creditor
whereas pledges over rights and claims generally need to be notified vis-à-vis the third party
debtor (e.g. the debtor of a payment claim or, in case of a pledge over shares, the company the
shares of which are being pledged) (Section 1280 BGB). No transfer of possession is required
if title to a moveable asset is transferred to the creditor for security purposes which is why in
practice security transfer agreements are frequently preferred to pledges. Similarly, security
assignments of rights and claims do not require notification of the third party debtor in order
to become valid as between the security provider and the creditor. However, prior to
disclosure of the assignment vis-à-vis the third party debtor, the bona fide third party debtor
benefits from certain statutory protections including, in particular, the right to perform its
obligations vis-à-vis the original creditor with effect also vis-à-vis the assignee (Section 407
BGB).
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1.2. Please briefly describe whether your jurisdiction provides for a procedure of
protection against creditors (usually initiated by a debtor at a time when the debtor is
yet not insolvent) and if so what are the basic assumptions.

Before a debtor is illiquid or over-indebted (see question 1.3), the debtor may file for
insolvency if it can show that its illiquidity is imminent (see Section 18 (1) of the German
Insolvency Code (Insolvenzordnung), the "IC").

Pursuant to the Act on Further Facilitation of the Reorganisation of Companies (Gesetz zur
weiteren Erleichtung der Sanierung von Unternehmen – ESUG), which came into force in
March 2012, a new procedure was introduced for the protection of debtors who voluntarily
file for insolvency. Under the new "protective shield procedure" (Schutzschirmverfahren), the
debtor may request a time period of up to three months during which enforcement actions of
individual creditors are stayed to provide the debtor with the opportunity to develop an
insolvency plan. The insolvency court (Insolvenzgericht) may order such procedure if the
following requirements are met pursuant to Section 270b IC: (1) the debtor has voluntarily
filed for insolvency and applied for self-administration of its estate, (2) the illiquidity of the
debtor is imminent or the debtor is over-indebted (but the debtor is not yet illiquid), (3) a
successful reorganisation of the debtor is not obviously hopeless and (4) an expert on
insolvency matters has confirmed (2) and (3).

In 2010, the German legislator adopted a special recovery and reorganisation regime with
regard to financial institutions under the Bank Reorganisation Act (Gesetz zur Reorganisation
von Kreditinstituten or KredReorgG) providing for limited creditor protection at an early
stage.

1.3. Please briefly describe the types of insolvency proceedings contemplated by your
legislation (liquidatory proceedings; reorganisation or recovery proceedings).

I. Reasons for the Institution of Insolvency Proceedings (Insolvenzgründe)

Under the German Insolvency Code, insolvency proceedings may be instituted on the basis of
the following grounds:

a. Illiquidity (Section 17 IC). The debtor is illiquid within the meaning of

Section 17 IC if it is unable to pay its debts as and when they fall due. German courts have
held that minor delays in paying outstanding debt not exceeding 10% of the aggregate amount
of due debt do not necessarily render a debtor illiquid, depending on the circumstances of the
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individual case. However, a debtor will be considered illiquid if it has generally stopped to
make payments.

b. Over-indebtedness (Section 19 IC). With respect to legal entities only,

insolvency proceedings may be instituted on the basis of the debtor’s over-indebtedness
(Section 19 IC). A debtor is over-indebted if: (1) the debtor's liabilities exceed the value of its
assets and (2) in the given circumstances continuation of the debtor's enterprise is less likely
than a shutdown (negative Fortführungsprognose). The second requirement has been
temporarily introduced by the German legislator during the financial crisis of 2008. With
effect as from January 2014, the second requirement will cease to apply, subject to further
amendment of the Insolvency Code.

c. Imminent Illiquidity (Section 18 IC). Finally, a debtor may apply for the
institution of insolvency proceedings if its illiquidity is imminent. Illiquidity is imminent if
the probability that the debtor will be unable to pay its debts as and when they fall due is
greater than the probability that its debts will be paid within the foreseeable future.

II. Receivership versus Self-Administration

After insolvency proceedings have been commenced by the competent insolvency court, in
most cases an insolvency administrator (Insolvenzverwalter) will be appointed to take
possession of, and administer, the estate. Prior to the official institution of the insolvency
proceedings, the insolvency court may appoint a preliminary insolvency administrator if it
deems such appointment necessary in order to protect the value of the estate (see Section 21
IC). In accordance with Section 56a IC, the preliminary creditors' committee (vorläufiger
Gläubigerausschuss) is entitled to suggest a candidate for the position of the insolvency
administrator.The insolvency court will be bound by the suggestion of the preliminary
creditors' committee if its candidate is qualified for the function and has been nominated
unanimously. However, it has to be noted that a creditors’ committee will not exist in all
instances. In particular, a creditors' committee will not be established if the enterprise of the
debtor has been shut down, if it seems unreasonable to do so in the light of the size of the
debtor's estate or if the delay caused by the composition of the creditors' committee would
have a detrimental effect on the financial situation of the debtor (Section 22a (3) IC).

In carrying out its rights and duties, the insolvency administrator is subject to the supervision
of the competent insolvency court, the creditors' committee (Gläubigerausschuss), if any, as
well as the creditors' assembly (Gläubigerversammlung).
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Alternatively, the insolvency court may – upon request of the debtor – order that the estate
shall remain in the possession of, and be administered by, the debtor itself (debtor-in-
possession proceedings, Eigenverwaltung, Sections 270 et seqq. IC). Such self-administration
by the debtor, however, is supervised by an administrator (Sachwalter), the insolvency court,
the creditors' committee, if any, as well as the creditors' assembly.

III. Types of Insolvency Proceedings

Satisfaction of creditors' claims may be achieved in insolvency proceedings either by

liquidation of the debtor's estate and subsequent distribution of the liquidation proceeds
amongst the creditors or through implementation of an agreed insolvency plan which allows
for a more flexible handling of the insolvency proceedings. Frequently, an insolvency plan
seeks to achieve a successful restructuring of the debtor. However, the insolvency plan may
instead provide for the liquidation of the debtor and the subsequent distribution of proceeds
among the creditors.

a. Standard Procedure. Where the insolvency proceedings aim at a straight-

forward liquidation of the debtor in accordance with the provisions of German insolvency
law, such liquidation may take place either in the form of a shut down of the enterprise and
subsequent sale of the various assets of the debtor's estate or by a sale of the debtor's
enterprise as a going concern (übertragende Sanierung). Typically, a going concern sale of
the debtor's enterprise is preferred to a piecemeal sale of the various assets of the estate as it is
presumed to generate higher proceeds.

b. Insolvency Plan (Insolvenzplan). The insolvency administrator or the debtor-

in-possession may, in cooperation with the creditors, develop and implement an insolvency
plan (Insolvenzplan). In insolvency plan proceedings, the parties have the opportunity to agree
on various measures to be taken in the course of the insolvency proceedings.

Prior to confirmation by the insolvency court, the plan needs to receive the consent of the
debtor and the creditors (Section 248 (1) IC). For the purpose of voting on the insolvency
plan, the creditors are divided into classes based on their legal position and economic interest
(see Sections 222, 243 IC). Secured creditors and unsecured creditors for example are to be
placed into separate classes. A class has granted its consent to the insolvency plan if the
majority of its members has voted in its favour and such majority holds more than 50% of the
aggregate principal amount of all claims held by all members of the class.
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The insolvency plan must obtain the consent of all classes of creditors. However, a class that
has refused its approval will be deemed to have approved the plan if (i) the position of the
members of the class under the plan is presumably not worse than without the plan, (ii) the
members of each class obtain a share, in a reasonable manner, of the value to be distributed
under the plan and (iii) the majority of classes has voted in favour of the plan (cram-down,
Section 245 IC).

Since March 2012, shareholders are also involved in an insolvency plan procedure (see
Sections 225a, 238a and 246a IC) in order to facilitate the implementation of a financial
restructuring that requires the cooperation of shareholders (in particular, debt to equity
swaps). Shareholders vote on the insolvency plan in classes and may be crammed down in a
similar manner as creditors.

c. Discharge of Residual Debt (Restschuldbefreiung). The procedure leading to

the discharge of liabilities remaining after insolvency proceedings is available only to
individual debtors. The individual debtor may obtain a discharge from all of its obligations
vis-à-vis its insolvency creditors that remained outstanding after completion of the insolvency
proceedings provided that the debtor has, for a period of six years, transferred all of its
seizable income to an insolvency trustee for distribution among the creditors.

d. Other. Special rules apply with respect to the insolvency of consumers

(Verbraucherinsolvenzverfahren) and small insolvency estates (Kleinverfahren) (see Sections
304 et seqq. IC). In addition, the German Insolvency Code provides for specific insolvency
proceedings with respect to a deceased person's estate (Nachlassinsolvenzverfahren, Sections
315 et seqq. IC).

1.4. Please briefly describe the types of claw-back actions available in your
jurisdiction. Please address, in particular, any of the following questions:

(a) Is claw-back automatic or does it require a positive assessment of the existence of

the relevant conditions by the court or receiver?

I. General

As a general rule, transactions relating to the debtor's estate entered into with the debtor after
the institution of the insolvency proceedings are invalid by operation of law (see Sections 81
and 82 IC). Pursuant to Section 80 IC, the power to dispose over the assets of the estate
automatically shifts from the debtor to the insolvency administrator as soon as the insolvency
proceedings have been opened (except in the case of self-administration).
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The claw-back provisions under the German Insolvency Code apply only to transactions
entered into with the debtor during the time period prior to the filing for insolvency or the
time period between the filing and the opening of the insolvency proceedings. Consequently,
the claw-back regime depends on the point in time in which a certain legal action occurred,
e.g. a security interest was granted.

II. "Automatic" Claw-back

The German Insolvency Code provides for an automatic claw-back only with respect to
security over assets of the estate that has been acquired by a creditor through enforcement
proceedings within one month prior to the filing for insolvency or thereafter. Security
acquired by enforcement during that time period becomes automatically invalid upon the
subsequent institution of insolvency proceedings (Section 88 IC). The automatic claw-back
does not apply to security interests acquired outside of an enforcement scenario; in particular,
it does not apply to security interests created by contractual agreement which may, however,
be subject to challenge by the insolvency administrator under one of the other claw-back
provisions described below.

III. Avoidance of Debtor Transactions (Insolvenzanfechtung)

Transactions entered into between the debtor and a creditor prior to the institution of the
insolvency proceedings that diminish the value of the estate to the detriment of the insolvency
creditors may be challenged by the insolvency administrator if certain additional conditions of
one of the following provisions are met:

a. "Congruent Coverage" (Section 130 IC). Transactions providing the creditor

with security or satisfaction for its claims may be challenged if:

• the relevant transaction was entered into within three months prior to the filing
for insolvency, the debtor, at the time of the transaction, had already been
illiquid and the creditor had positive knowledge thereof (Section 130 (1) No. 1
IC); or

• the relevant transaction was entered into after the filing for insolvency and, at
the time of the transaction, the creditor had positive knowledge of the debtor's
illiquidity or of the fact that an application for the opening of insolvency
proceedings had previously been filed (Section 130 (1) No. 2).
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b. "Incongruent Coverage" (Section 131 IC). Transactions providing the

creditor with security or satisfaction for its claims to which the creditor was not entitled at that
time or not in that manner are subject to claw-back if:

• the relevant transaction was entered into during the last month preceding the
filing for insolvency or thereafter (Section 131 (1) No. 1); or

• the relevant transaction was entered into during the second or third month prior
to the filing for insolvency and the debtor, at the time of the transaction, was
already illiquid (Section 131 (1) No. 2); or

• the relevant transaction was entered into during the second or third month prior
to the filing for insolvency and the creditor, at the time of the transaction, had
positive knowledge that the transaction was detrimental to the insolvency
creditors (Section 131 (1) Nr. 3 IC).

c. Transactions Directly Impairing Other Creditors (Section 132 IC). In

addition, transactions by the debtor entered into with a creditor that is not already voidable
under the more specific Sections 130 and 131 IC described above are subject to claw-back if:

• the relevant transaction was entered into during the last three months prior to
the filing for insolvency or thereafter, the debtor, at the time of the transaction,
was already illiquid and the other party had positive knowledge thereof
(Section 132 (1) No. 1 IC); or

• the relevant transaction was entered into after the filing for insolvency and, at
the time of the transaction, the creditor had positive knowledge of the debtor's
illiquidity or of the fact that an application for the institution of insolvency
proceedings had been filed (Section 132 (1) No. 2 IC);

and the relevant transaction has caused a direct harm to the insolvency creditors.

In light of the above provisions, the most critical time period from a claw-back perspective is
the time period starting three months prior to the filing for insolvency and ending with the
institution of insolvency proceedings. However, longer periods of up to ten years apply to
certain transactions.
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d. Wilful Impairment (Section 133 IC). Transactions entered into during the last
ten years prior to the filing for insolvency or thereafter may be contested by the insolvency
administrator if the debtor, when carrying out the relevant transaction, acted in bad faith with
the intention to harm its creditors and the other party to the transaction was aware of the
debtor's intention (Section 133 (1) IC).

Furthermore, a transaction detrimental to the position of the insolvency creditors entered into
between the debtor and a closely related person is also challengeable, unless the transaction
took place more than two years prior to the filing for insolvency or the closely related person
was unaware of the intention of the debtor to discriminate its other creditors (Section 133 (2)
IC).

e. Gratuitous Benefits (Section 134 IC). Gratuitous benefits granted by the

debtor may be contested by the insolvency administrator if granted within four years prior to
the filing for insolvency (Section 134 IC).

f. Claw-back Provisions in Relation to Shareholder Loans (Section 135 IC)

and Other Specific Claw-back Provisions. Specific claw-back provisions apply to
transactions entered into between the debtor and its (direct or indirect) shareholder in
connection with shareholder loans.

Pursuant to Section 135 (1) IC, transactions by which security or satisfaction is being granted
for loan repayment claims of a shareholder (or an economically comparable claim) are subject
to challenge if, in the case of security, the relevant transaction took place during the last ten
years prior to the filing for insolvency or, in the case of satisfaction being granted, the
relevant transaction took place within one year prior to the filing for insolvency. The same
rules apply to transactions having a similar economic effect (e.g. payments by the debtor to a
creditor whose claim is secured by security granted by the shareholder). Furthermore, loans
granted by non-shareholders may be treated as shareholder loans within the meaning of
Section 135 IC if, for example, such non-shareholder is directly or indirectly controlled by a
direct or indirect shareholder of the debtor.

The claw-back provisions contained in Section 135 IC only apply in case of a corporate
debtor where none of the shareholders exposed to personal liability is an individual (Sections
135 (4), 39 (4) IC).

Additional claw-back provisions apply to transactions entered into between the insolvent
company and its silent partner (stiller Gesellschafter) (Section 136 IC) or payments by the
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debtor effected in the form of cheques and acceptances (Scheck- und Wechselzahlungen)
(Section 137 IC).

(b) Does your legislation differentiate between transactions (including the granting of
security) with consideration and without consideration?

Gratuitous transactions are subject to stricter claw-back rules (see Section 134 IC). Gratuitous
transactions entered into by the debtor within the last four years prior to the filing for
insolvency may be contested by the insolvency administrator without any additional
requirements. In particular, neither the illiquidity of, nor a certain intention on behalf of, the
debtor at the time of the transaction is required nor a certain form of knowledge on behalf of
the beneficiary.

(c) Does your legislation differentiate in the cases of security in general, between
security taken concurrently with the granting of the secured debt and security taken in a
different period of time?

The granting of security concurrently with the incurrence of the secured debt may be qualified
as a "cash transaction" (Bargeschäft) within the meaning of Section 142 IC. As such, the cash
transaction is privileged and the claw-back provisions do not apply. The only claw-back
provision that remains applicable in the case of a cash transaction is Section 133 IC (Wilful
Impairment).

A transaction is considered a cash transaction within the meaning of Section 142 IC if the
debtor receives a consideration of equal value in return for and concurrently with its own
performance (e.g. the debtor grants security for a new loan). Cash transactions are privileged
to enable the insolvent debtor to continue with its ordinary business until the insolvency
proceedings have been instituted. In addition, cash transactions are not considered to be
detrimental to the other creditors of the debtor as they do not result in a reduction of the
overall value of the debtor's estate.

(d) Are there special provisions for intra-group transactions and transactions
between related parties?

Under German insolvency law, there are no specific provisions addressing intra-group
transactions. Related parties, however, are generally presumed to be aware of the financial
situation of the debtor and thus, the threshold of meeting the conditions of claw-back
provisions that require a certain form of knowledge on behalf of the debtor's counterparty is
significantly lower compared to other parties. There is a rebuttable statutory presumption that
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related parties have had the required knowledge at the time of the contested transaction (see
Sections 130 (3), 131 (2) and 132 (3) IC), in which care the related parties bear the burden of
proof that they were not aware of the debtor's illiquidity, the insolvency filing or the
detrimental impact of the transaction on the position of the other creditors at the time of the
contested transaction.

Related persons with regard to corporate entities are (Section 138 (2) IC):

• members of the board of directors, members of the supervisory board, general

partners and qualified shareholders holding more than one quarter of the
debtor's share capital;
• any person or company having access to information on the financial situation
of the debtor due to a comparable corporate or contractual relationship with the
debtor;
• persons, in particular family members, having a close relationship to one of the
above persons, unless the latter is subject to a statutory duty of confidentiality.

Parent companies are usually considered related persons with regard to their subsidiaries.
Affiliated companies may be qualified as related persons within the meaning of Section 138
(2) IC.

2. Specific questions
2.1 Is claw-back subject to specific rules with respect to any type of security available
in your jurisdiction? If so, please describe any such rules.

With the exception of Section 88 IC, there are no specific claw-back provisions with regard to
specific types of security. Under Section 88 IC, security interests acquired by way of taking
enforcement measures vis-à-vis the debtor are invalid upon the institution of the insolvency
proceedings, provided that the relevant security interest was acquired within the last month
prior to the filing for insolvency or thereafter. Section 88 IC does not apply to security
interests created by contractual agreement or security interests arising by operation of law
outside of an enforcement scenario.
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2.2 Are there any total or partial exemptions from claw-back, depending on (for
example):

(a) The type of security;

Under certain circumstances, specific financial security interests, such as pledges on securities
or money market instruments, are exempt from claw-back pursuant to Section 130 (1)
sentence 2 IC. However, this exemption has a very limited scope and solely applies to
financial institutions, including public entities, and their corporate business partners.
Individuals, partnerships (Personengesellschaften) and sole proprietors are not eligible to
grant or to take financial security interests (see Section 1 (17) of the German Banking Act and
Art. 1 para. 2 (e) of the EU Directive 2002/47/EC).

(b) The type of transaction secured (including its legal form);

As mentioned above (see question 1.4 (c)), cash transactions are generally exempt from claw-
back (Section 142 IC).

(c) The type of (wider) transaction within which the financing is granted and
the relevant security is taken (e.g., financings granted in the context of certain
reorganisation proceedings);

Apart from the privilege for cash transactions (see question 1.4 (c)), transactions and related
security interests in the context of reorganisation proceedings are generally not exempt from
claw-back.

Transactions by which security or satisfaction is granted for a shareholder loan may, however,
be exempt from claw-back under Section 135 IC if the relevant shareholder has acquired its
shares in the debtor with the intention to facilitate the debtor's restructuring (Sections 135 (4),
39 (4) IC). Only new shareholders may benefit from the relevant exemption, i.e. the
acquisition of additional shares by an existing shareholder, even if accompanied by its
intention to rehabilitate the debtor, does not qualify for the exemption. In addition, it is a
requirement for the exemption to apply that, at the time of the acquisition of the shares, a
successful restructuring of the debtor must be possible and the implementation of the
contemplated restructuring measures must, from an objective perspective, be suitable to allow
for a successful reorganisation of the debtor. If these conditions are met, all loans granted by
the relevant shareholder will be exempt from claw-back pursuant to Section 135 (4) IC. Other
claw-back provisions, however, may continue to apply.
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(d) The nature of the grantor of security;

No.

(e) The nature of the beneficiary of security;

No.

2.3 How does your legal system address the claw-back of quasi-security transactions,
e.g. a sale of a property in return for a price payable in instalments may hide a financing
transaction secured by the property; which legal regime applies in this case: that of the
claw-back of security, or that of the termination of pending (sale and purchase)
agreements?

With respect to quasi-security transactions, the legal analysis will depend on the
circumstances of each individual case. Where a sale and purchase agreement has not yet been
fully performed by either party, the insolvency administrator will have the choice to either
continue to demand performance of the transaction or to reverse it (Section 103 IC). Where
one of the parties to the transaction or both parties have fully performed their obligations
thereunder prior to the institution of the insolvency proceedings, Section 103 IC no longer
applies. The insolvency administrator, however, will be entitled to claw-back if the relevant
transaction is found to be detrimental to the interests of the insolvency creditors and all
further conditions of one of the claw-back rules under Sections 130 et seqq. IC are met.

In general, the above rules also apply should a court find that the sale of the property is in
substance to be qualified as a secured financing transaction. To the extent advances have been
made by the lender prior to the institution of the insolvency proceedings, the transaction will
be deemed performed on behalf of such lender; to such extent, Section 103 IC no longer
applies (Section 108 (2) IC). In this case, the "quasi-security" granted by the debtor will
remain valid and continue to secure the repayment claim of the lender. Yet the granting of the
security may still be voidable under the claw-back provisions of Sections 130 et seqq. IC,
provided that the relevant conditions are met.

2.4 What are the legal consequences of the claw-back for the parties involved? For
example:

(a) Is an agreement, deed or transaction subject to "claw-back" invalid or

just ineffective between the debtor and the party to the agreement;

The details of the legal consequences of a successful claw-back in respect of a contested

transaction are not entirely clear in German law. However, according to the majority view of
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legal authors and experts, the contested transaction as such remains valid though the
insolvency administrator is entitled to request that all benefits the creditor has received in
connection with the transaction be returned to the estate.

(b) To what extent can claw-back affect the successful exercise or enforcement
of security rights as may have occurred prior to the adjudication in bankruptcy
(e.g. claims cashed by the secured lender under a security assignment of
receivables prior to the adjudication in bankruptcy)? Is there a difference
between the case of "self-enforcing" security (e.g., the cashing of claims referred
to above) and a court-driven enforcement (e.g., the enforcement of a mortgage)?

Security interests acquired by way of enforcement or by actions for which a court order or
other executable deed (Vollstreckungstitel) has previously been obtained are governed by the
claw-back provisions in the same manner as consensual transactions between the debtor and a
creditor (Section 141 IC).

If the creditor has obtained a security interest prior to the opening of the insolvency
proceedings, neither such security interest nor the proceeds generated from its realisation are
subject to the claw-back regime of German insolvency law. Even voluntary payments made
by the debtor shortly before the opening of the insolvency proceedings to a creditor holding
such a security interest are not subject to claw-back provided that the value of the security is
equal to or higher than the principal amount of the repaid secured claim. In such a scenario,
the insolvency creditors do not suffer any harm because the estate is re-enhanced by the value
of the security in exchange for the debtor's payments.

2.5 What are the rights of the parties involved once the claw-back had been enforced
(as a result of operation of law or court ruling)?

As mentioned above (see question 2.4(a)), upon a successful claw-back, the insolvency
administrator is entitled to request that whatever benefit the creditor has received in
connection with the transaction be returned to the estate (Section 143 (1) IC). For example,
where the grant of security has been successfully contested, the insolvency administrator
could require the creditor to waive its security rights and to re-transfer or re-assign the
collateral.

Where a creditor had to return amounts received from the debtor on account of a claim, it
becomes re-entitled to the relevant claim which is reinstated by operation of law (see Section
144 (1) IC). The creditor may seek satisfaction as an insolvency creditor in the course of the
insolvency proceedings.
 16

Furthermore, any consideration granted by the creditor to the debtor in connection with the
contested transaction has to be returned, provided that such consideration continues to exist as
an identifiable item within the debtor's estate or continues to enrich the estate (Section 144 (2)
IC). In all other cases, the creditor is limited to pursue its claim for restitution as an
insolvency creditor in the course of the insolvency proceedings.

2.6 What is the claw-back regime for security granted by third parties/in respect of
third party indebtedness? Please analyse from the perspective of the insolvency of the
debtor and of the insolvency of the third party grantor of security. Does the possibility
for the third party grantor to act in recourse against the insolvent debtor make a
difference?

I. Insolvency of Third Party Grantor of Security

a. Claw-back vis-à-vis the Third Party Debtor. The insolvency administrator

may contest the grant of the security interest by the insolvent debtor vis-à-vis the third party
debtor if the insolvency creditors are adversely affected by the grant of such security interest.
Such adverse effect will usually be found if the insolvent debtor / security provider is not
entitled to claim recourse from the third party debtor for whose obligations the security has
been granted or if such recourse claim is without value. In this scenario, the insolvency
administrator may be entitled to request compensation pursuant to Section 134 IC provided
that the grant of the security interest was accompanied by a joint understanding between the
security provider and the third party debtor that the security provider waives its claim for
recourse or that such recourse would be of no value for the security provider. In the absence
of such understanding between the parties, the transaction may be voidable only pursuant to
Section 133 IC (Wilful Impairment) if the parties acted in bad faith with the intention to harm
the creditors of the security provider.

b. Claw-back vis-à-vis the Secured Creditor. The insolvency administrator may

attempt to contest the grant of security vis-à-vis the secured creditor. According to the
majority view in German law, Sections 130 and 131 IC would not be applicable because
arguably the relevant provisions address exclusively transactions between the insolvent debtor
and its own creditors. Regardless of whether Sections 130 and 131 IC apply, it is the common
view that the grant of security for the obligations of another may be subject to claw-back vis-
à-vis the secured creditor under Section 133 IC (Wilful Impairment) or Section 134 IC
(Gratuitous Benefit).

II. Insolvency of the Debtor

 17

A security interest granted by a third party to secure indebtedness of the insolvent debtor is
usually not detrimental to other insolvency creditors even if the security provider has a
recourse claim against the debtor. The recourse claim of the security provider replaces the
claim of the relevant secured creditor once the latter has received satisfaction of its claims
against the insolvent debtor either from the proceeds of realisation of the security or through
pay-off by the security provider seeking to avoid enforcement of the security granted by it.
However, a detrimental effect for the other insolvency creditors may be found if the security
provider (other than the creditor whose claim has been satisfied by it) has been granted
security by the insolvent debtor for its recourse claim on other property of the insolvent
debtor so that the security provider is in a position to seek satisfaction of its recourse claim
against the debtor from the proceeds of the realisation of such security on a priority basis.

2.7 What is the claw-back regime for security which has been agreed (i.e. the
relevant security agreement has been executed) but not yet perfected at the time of the
adjudication in bankruptcy of the debtor/grantor?

The point in time as of which a transaction is legally deemed to have taken place is relevant in
the claw-back context. It determines whether the relevant transaction is void because it was
carried out when the debtor no longer had the power to dispose over its assets (i.e. after the
opening of insolvency proceedings, see Sections 80, 81, 91 IC and question 1.4 (a) above) or
whether the transaction as such is valid subject only to a potential right of claw-back by the
insolvency administrator. Under German law, a transaction is deemed to take place at the
point in time in which it becomes legally effective (Section 140 (1) IC). Consequently, the
general rule is that all elements of the transaction, including any applicable perfection
formalities, must be satisfied prior to the institution of the insolvency proceedings lest the
transaction is deemed void (Section 91 (1) IC). However, the following exceptions apply:

a. Transactions Subject to Further Conditions. If a transaction is subject to a

further contractual condition precedent in the form of an uncertain future event, the
transaction is deemed completed at the time the relevant agreement is entered into (Sections
140 (3), 191 IC). However, the accrual of the right that forms the object of the relevant
transaction or agreement (e.g. assignment of future claims) does not constitute such a
condition. Claims falling due on a specified future date, on the other hand, are treated as valid,
present claims in the course of the insolvency proceedings.

b. Security Requiring Registration. Another exception applies to security

interests which require official registration (e.g. mortgages and land charges). Under German
law, security interests requiring registration are deemed to have been validly created for
insolvency purposes once:
 18

• all other conditions of the transaction apart from the registration requirement
have been fulfilled;
• the security agreement has been irrevocably entered into by the security
provider; and
• the creditor has filed for registration of the security with the competent
register.

If all of the above requirements are met prior to the institution of the insolvency proceedings,
the creditor will acquire a valid security interest upon registration even if such registration
occurs after the insolvency proceedings have been commenced (Section 140 (2) IC).
However, the relevant security interest might still be subject to claw-back by the insolvency
administrator.

Frankfurt am Main, May 2012

Contact:

Dr. Dirk H. Bliesener, LL.M. (Yale)

Rechtsanwalt, Attorney-at-Law (New York)
Partner
HENGELER MUELLER
Partnerschaft von Rechtsanwälten
Bockenheimer Landstraße 24
60323 Frankfurt am Main
Germany

Office +49 69 17095559

Mobile +49 1733221515
Facsimile +49 69 170957558
Email dirk.bliesener@hengeler.com
www.hengeler.com
 Claw-back of Security in Insolvency

The following analysis is for informational purposes only and does not constitute
legal advice by HENGELER MUELLER Partnerschaft von Rechtsanwälten.

1. Introductory questions

1.1 Please briefly describe the main type of security in your jurisdiction (per type of
asset; per perfection technique; per type of secured obligation).

I. Security Interests in Property (Realsicherheiten) vs. Personal Security

Interests (Personalsicherheiten)

In German law, security interests are commonly divided into two main categories: security
interests in property and personal security interests.

a. Security Interests in Property (Realsicherheiten). Security interests in

property relate to a specific tangible or intangible asset of the security provider that shall
become liable for the secured debt. They include security interests with respect to the
following types of assets:

(i) Real Estate. A creditor may take security over real estate in the form of
a mortgage (Hypothek, Sections 1113 to 1190 of the German Civil Code (Bürgerliches
Gesetzbuch), the "BGB") or a land charge (Grundschuld, Sections 1191 to 1198
BGB). Other forms of security over real estate include rent charges (Rentenschuld,
Sections 1199 to 1203 BGB) and annuity land charges (Reallast, Sections 1105 to
1112 BGB).

(ii) Moveable Assets. Debt can also be secured by way of a transfer of title
for security purposes in respect of moveable assets where the security provider may (if
desired) retain possession of the assets (Sicherungsübereignung, Sections 929 sentence
1 and 930 BGB). German law also recognises retention of title arrangements
 2

(Eigentumsvorbehalt) by which the seller or supplier of a certain asset delivered to the

purchaser retains title to such asset until the purchase price has been paid (Section 449
BGB).

In addition, the creditor of a claim and the security provider may agree on the creation
of a pledge over the moveable asset in favour of the creditor (Pfandrecht an
beweglichen Sachen, Sections 1204 to 1259 BGB).

Specific provisions apply to security granted over ships and aircraft in the form of ship
mortgages (Schiffshypothek, Sections 24 to 81a of the Act on Rights over Registered
Ships and Ships under Construction) and registered liens on aircraft
(Registerpfandrecht an Luftfahrzeugen, Sections 1 to 74 of the Act on Rights in
Aircraft).

(iii) Intangible Assets. Intangible assets such as rights and claims can be
utilised as security either by way of a security assignment (Sicherungsabtretung,
Sections 398, 413 BGB) or by way of a pledge of rights (Pfandrecht an Rechten,
Sections 1273 to 1296 BGB).

b. Personal Security Interests (Personalsicherheiten). Personal security

interests are agreements by which a person promises the creditor of a third party to become
liable for the performance of the third party's obligation. Personal security interests may take
various forms, including a suretyship (Bürgschaft, Section 765 BGB), guarantee (Garantie),
additional assumption of debt (Schuldbeitritt) or abstract acknowledgement of debt
(abstraktes Schuldversprechen, Sections 780, 781 BGB).

II. Accessory Security vs. Non-Accessory Security

In German law, security interests are either accessory or non-accessory in nature. Accessory
security interests are closely linked to, and share the fate of, the underlying secured claim.
Consequently, accessory security interests do not come into existence without a valid secured
claim and cease to exist, by operation of law, as soon as the relevant secured claim has been
extinguished. Furthermore, accessory security interests will be automatically transferred
together with the underlying secured claim and cannot be separately transferred.

Non-accessory security interests, on the other hand, are independent of the underlying secured
claim. Consequently, they are more flexible from the perspective of the secured creditor. In
particular, the abstract nature of non-accessory security interests allows for their re-utilisation
 3

for purposes other than the original security purpose. Non-accessory security interests need to
be re-transferred or re-assigned to the relevant security provider and do not automatically
lapse upon extinguishment of the underlying secured claim.

Mortgages and pledges are accessory security interests, whereas assignments and transfers for
security purposes as well as land charges belong to the group of non-accessory security
interests.

III. Perfection Techniques

Different perfection requirements apply to the various forms of security interests. In all cases
where security is being granted on a consensual basis, the creditor and the security provider
need to enter into an agreement providing for the creation of the relevant security. Usually,
the relevant security agreement is not subject to a specific form requirement. Exceptions to
this general rule include the surety and the abstract acknowledgement of debt where the
declaration of the security provider must be made in writing (Sections 780, 781 and 766
BGB). The granting of pledges over shares held in a German limited liability company needs
to be notarised (Section 15 (3) of the German Limited Liability Companies Act in conjunction
with Section 1274 BGB).

Depending on the type of security being taken, additional requirements need to be met to
establish the relevant security interest: Security taken over real estate, including mortgages
and land charges, needs to be registered with the competent land register. Pledges over
moveable assets require transfer of possession in respect of the collateral to the creditor
whereas pledges over rights and claims generally need to be notified vis-à-vis the third party
debtor (e.g. the debtor of a payment claim or, in case of a pledge over shares, the company the
shares of which are being pledged) (Section 1280 BGB). No transfer of possession is required
if title to a moveable asset is transferred to the creditor for security purposes which is why in
practice security transfer agreements are frequently preferred to pledges. Similarly, security
assignments of rights and claims do not require notification of the third party debtor in order
to become valid as between the security provider and the creditor. However, prior to
disclosure of the assignment vis-à-vis the third party debtor, the bona fide third party debtor
benefits from certain statutory protections including, in particular, the right to perform its
obligations vis-à-vis the original creditor with effect also vis-à-vis the assignee (Section 407
BGB).
 4

1.2. Please briefly describe whether your jurisdiction provides for a procedure of
protection against creditors (usually initiated by a debtor at a time when the debtor is
yet not insolvent) and if so what are the basic assumptions.

Before a debtor is illiquid or over-indebted (see question 1.3), the debtor may file for
insolvency if it can show that its illiquidity is imminent (see Section 18 (1) of the German
Insolvency Code (Insolvenzordnung), the "IC").

Pursuant to the Act on Further Facilitation of the Reorganisation of Companies (Gesetz zur
weiteren Erleichtung der Sanierung von Unternehmen – ESUG), which came into force in
March 2012, a new procedure was introduced for the protection of debtors who voluntarily
file for insolvency. Under the new "protective shield procedure" (Schutzschirmverfahren), the
debtor may request a time period of up to three months during which enforcement actions of
individual creditors are stayed to provide the debtor with the opportunity to develop an
insolvency plan. The insolvency court (Insolvenzgericht) may order such procedure if the
following requirements are met pursuant to Section 270b IC: (1) the debtor has voluntarily
filed for insolvency and applied for self-administration of its estate, (2) the illiquidity of the
debtor is imminent or the debtor is over-indebted (but the debtor is not yet illiquid), (3) a
successful reorganisation of the debtor is not obviously hopeless and (4) an expert on
insolvency matters has confirmed (2) and (3).

In 2010, the German legislator adopted a special recovery and reorganisation regime with
regard to financial institutions under the Bank Reorganisation Act (Gesetz zur Reorganisation
von Kreditinstituten or KredReorgG) providing for limited creditor protection at an early
stage.

1.3. Please briefly describe the types of insolvency proceedings contemplated by your
legislation (liquidatory proceedings; reorganisation or recovery proceedings).

I. Reasons for the Institution of Insolvency Proceedings (Insolvenzgründe)

Under the German Insolvency Code, insolvency proceedings may be instituted on the basis of
the following grounds:

a. Illiquidity (Section 17 IC). The debtor is illiquid within the meaning of

Section 17 IC if it is unable to pay its debts as and when they fall due. German courts have
held that minor delays in paying outstanding debt not exceeding 10% of the aggregate amount
of due debt do not necessarily render a debtor illiquid, depending on the circumstances of the
 5

individual case. However, a debtor will be considered illiquid if it has generally stopped to
make payments.

b. Over-indebtedness (Section 19 IC). With respect to legal entities only,

insolvency proceedings may be instituted on the basis of the debtor’s over-indebtedness
(Section 19 IC). A debtor is over-indebted if: (1) the debtor's liabilities exceed the value of its
assets and (2) in the given circumstances continuation of the debtor's enterprise is less likely
than a shutdown (negative Fortführungsprognose). The second requirement has been
temporarily introduced by the German legislator during the financial crisis of 2008. With
effect as from January 2014, the second requirement will cease to apply, subject to further
amendment of the Insolvency Code.

c. Imminent Illiquidity (Section 18 IC). Finally, a debtor may apply for the
institution of insolvency proceedings if its illiquidity is imminent. Illiquidity is imminent if
the probability that the debtor will be unable to pay its debts as and when they fall due is
greater than the probability that its debts will be paid within the foreseeable future.

II. Receivership versus Self-Administration

After insolvency proceedings have been commenced by the competent insolvency court, in
most cases an insolvency administrator (Insolvenzverwalter) will be appointed to take
possession of, and administer, the estate. Prior to the official institution of the insolvency
proceedings, the insolvency court may appoint a preliminary insolvency administrator if it
deems such appointment necessary in order to protect the value of the estate (see Section 21
IC). In accordance with Section 56a IC, the preliminary creditors' committee (vorläufiger
Gläubigerausschuss) is entitled to suggest a candidate for the position of the insolvency
administrator.The insolvency court will be bound by the suggestion of the preliminary
creditors' committee if its candidate is qualified for the function and has been nominated
unanimously. However, it has to be noted that a creditors’ committee will not exist in all
instances. In particular, a creditors' committee will not be established if the enterprise of the
debtor has been shut down, if it seems unreasonable to do so in the light of the size of the
debtor's estate or if the delay caused by the composition of the creditors' committee would
have a detrimental effect on the financial situation of the debtor (Section 22a (3) IC).

In carrying out its rights and duties, the insolvency administrator is subject to the supervision
of the competent insolvency court, the creditors' committee (Gläubigerausschuss), if any, as
well as the creditors' assembly (Gläubigerversammlung).
 6

Alternatively, the insolvency court may – upon request of the debtor – order that the estate
shall remain in the possession of, and be administered by, the debtor itself (debtor-in-
possession proceedings, Eigenverwaltung, Sections 270 et seqq. IC). Such self-administration
by the debtor, however, is supervised by an administrator (Sachwalter), the insolvency court,
the creditors' committee, if any, as well as the creditors' assembly.

III. Types of Insolvency Proceedings

Satisfaction of creditors' claims may be achieved in insolvency proceedings either by

liquidation of the debtor's estate and subsequent distribution of the liquidation proceeds
amongst the creditors or through implementation of an agreed insolvency plan which allows
for a more flexible handling of the insolvency proceedings. Frequently, an insolvency plan
seeks to achieve a successful restructuring of the debtor. However, the insolvency plan may
instead provide for the liquidation of the debtor and the subsequent distribution of proceeds
among the creditors.

a. Standard Procedure. Where the insolvency proceedings aim at a straight-

forward liquidation of the debtor in accordance with the provisions of German insolvency
law, such liquidation may take place either in the form of a shut down of the enterprise and
subsequent sale of the various assets of the debtor's estate or by a sale of the debtor's
enterprise as a going concern (übertragende Sanierung). Typically, a going concern sale of
the debtor's enterprise is preferred to a piecemeal sale of the various assets of the estate as it is
presumed to generate higher proceeds.

b. Insolvency Plan (Insolvenzplan). The insolvency administrator or the debtor-

in-possession may, in cooperation with the creditors, develop and implement an insolvency
plan (Insolvenzplan). In insolvency plan proceedings, the parties have the opportunity to agree
on various measures to be taken in the course of the insolvency proceedings.

Prior to confirmation by the insolvency court, the plan needs to receive the consent of the
debtor and the creditors (Section 248 (1) IC). For the purpose of voting on the insolvency
plan, the creditors are divided into classes based on their legal position and economic interest
(see Sections 222, 243 IC). Secured creditors and unsecured creditors for example are to be
placed into separate classes. A class has granted its consent to the insolvency plan if the
majority of its members has voted in its favour and such majority holds more than 50% of the
aggregate principal amount of all claims held by all members of the class.
 7

The insolvency plan must obtain the consent of all classes of creditors. However, a class that
has refused its approval will be deemed to have approved the plan if (i) the position of the
members of the class under the plan is presumably not worse than without the plan, (ii) the
members of each class obtain a share, in a reasonable manner, of the value to be distributed
under the plan and (iii) the majority of classes has voted in favour of the plan (cram-down,
Section 245 IC).

Since March 2012, shareholders are also involved in an insolvency plan procedure (see
Sections 225a, 238a and 246a IC) in order to facilitate the implementation of a financial
restructuring that requires the cooperation of shareholders (in particular, debt to equity
swaps). Shareholders vote on the insolvency plan in classes and may be crammed down in a
similar manner as creditors.

c. Discharge of Residual Debt (Restschuldbefreiung). The procedure leading to

the discharge of liabilities remaining after insolvency proceedings is available only to
individual debtors. The individual debtor may obtain a discharge from all of its obligations
vis-à-vis its insolvency creditors that remained outstanding after completion of the insolvency
proceedings provided that the debtor has, for a period of six years, transferred all of its
seizable income to an insolvency trustee for distribution among the creditors.

d. Other. Special rules apply with respect to the insolvency of consumers

(Verbraucherinsolvenzverfahren) and small insolvency estates (Kleinverfahren) (see Sections
304 et seqq. IC). In addition, the German Insolvency Code provides for specific insolvency
proceedings with respect to a deceased person's estate (Nachlassinsolvenzverfahren, Sections
315 et seqq. IC).

1.4. Please briefly describe the types of claw-back actions available in your
jurisdiction. Please address, in particular, any of the following questions:

(a) Is claw-back automatic or does it require a positive assessment of the existence of

the relevant conditions by the court or receiver?

I. General

As a general rule, transactions relating to the debtor's estate entered into with the debtor after
the institution of the insolvency proceedings are invalid by operation of law (see Sections 81
and 82 IC). Pursuant to Section 80 IC, the power to dispose over the assets of the estate
automatically shifts from the debtor to the insolvency administrator as soon as the insolvency
proceedings have been opened (except in the case of self-administration).
 8

The claw-back provisions under the German Insolvency Code apply only to transactions
entered into with the debtor during the time period prior to the filing for insolvency or the
time period between the filing and the opening of the insolvency proceedings. Consequently,
the claw-back regime depends on the point in time in which a certain legal action occurred,
e.g. a security interest was granted.

II. "Automatic" Claw-back

The German Insolvency Code provides for an automatic claw-back only with respect to
security over assets of the estate that has been acquired by a creditor through enforcement
proceedings within one month prior to the filing for insolvency or thereafter. Security
acquired by enforcement during that time period becomes automatically invalid upon the
subsequent institution of insolvency proceedings (Section 88 IC). The automatic claw-back
does not apply to security interests acquired outside of an enforcement scenario; in particular,
it does not apply to security interests created by contractual agreement which may, however,
be subject to challenge by the insolvency administrator under one of the other claw-back
provisions described below.

III. Avoidance of Debtor Transactions (Insolvenzanfechtung)

Transactions entered into between the debtor and a creditor prior to the institution of the
insolvency proceedings that diminish the value of the estate to the detriment of the insolvency
creditors may be challenged by the insolvency administrator if certain additional conditions of
one of the following provisions are met:

a. "Congruent Coverage" (Section 130 IC). Transactions providing the creditor

with security or satisfaction for its claims may be challenged if:

• the relevant transaction was entered into within three months prior to the filing
for insolvency, the debtor, at the time of the transaction, had already been
illiquid and the creditor had positive knowledge thereof (Section 130 (1) No. 1
IC); or

• the relevant transaction was entered into after the filing for insolvency and, at
the time of the transaction, the creditor had positive knowledge of the debtor's
illiquidity or of the fact that an application for the opening of insolvency
proceedings had previously been filed (Section 130 (1) No. 2).
 9

b. "Incongruent Coverage" (Section 131 IC). Transactions providing the

creditor with security or satisfaction for its claims to which the creditor was not entitled at that
time or not in that manner are subject to claw-back if:

• the relevant transaction was entered into during the last month preceding the
filing for insolvency or thereafter (Section 131 (1) No. 1); or

• the relevant transaction was entered into during the second or third month prior
to the filing for insolvency and the debtor, at the time of the transaction, was
already illiquid (Section 131 (1) No. 2); or

• the relevant transaction was entered into during the second or third month prior
to the filing for insolvency and the creditor, at the time of the transaction, had
positive knowledge that the transaction was detrimental to the insolvency
creditors (Section 131 (1) Nr. 3 IC).

c. Transactions Directly Impairing Other Creditors (Section 132 IC). In

addition, transactions by the debtor entered into with a creditor that is not already voidable
under the more specific Sections 130 and 131 IC described above are subject to claw-back if:

• the relevant transaction was entered into during the last three months prior to
the filing for insolvency or thereafter, the debtor, at the time of the transaction,
was already illiquid and the other party had positive knowledge thereof
(Section 132 (1) No. 1 IC); or

• the relevant transaction was entered into after the filing for insolvency and, at
the time of the transaction, the creditor had positive knowledge of the debtor's
illiquidity or of the fact that an application for the institution of insolvency
proceedings had been filed (Section 132 (1) No. 2 IC);

and the relevant transaction has caused a direct harm to the insolvency creditors.

In light of the above provisions, the most critical time period from a claw-back perspective is
the time period starting three months prior to the filing for insolvency and ending with the
institution of insolvency proceedings. However, longer periods of up to ten years apply to
certain transactions.
 10

d. Wilful Impairment (Section 133 IC). Transactions entered into during the last
ten years prior to the filing for insolvency or thereafter may be contested by the insolvency
administrator if the debtor, when carrying out the relevant transaction, acted in bad faith with
the intention to harm its creditors and the other party to the transaction was aware of the
debtor's intention (Section 133 (1) IC).

Furthermore, a transaction detrimental to the position of the insolvency creditors entered into
between the debtor and a closely related person is also challengeable, unless the transaction
took place more than two years prior to the filing for insolvency or the closely related person
was unaware of the intention of the debtor to discriminate its other creditors (Section 133 (2)
IC).

e. Gratuitous Benefits (Section 134 IC). Gratuitous benefits granted by the

debtor may be contested by the insolvency administrator if granted within four years prior to
the filing for insolvency (Section 134 IC).

f. Claw-back Provisions in Relation to Shareholder Loans (Section 135 IC)

and Other Specific Claw-back Provisions. Specific claw-back provisions apply to
transactions entered into between the debtor and its (direct or indirect) shareholder in
connection with shareholder loans.

Pursuant to Section 135 (1) IC, transactions by which security or satisfaction is being granted
for loan repayment claims of a shareholder (or an economically comparable claim) are subject
to challenge if, in the case of security, the relevant transaction took place during the last ten
years prior to the filing for insolvency or, in the case of satisfaction being granted, the
relevant transaction took place within one year prior to the filing for insolvency. The same
rules apply to transactions having a similar economic effect (e.g. payments by the debtor to a
creditor whose claim is secured by security granted by the shareholder). Furthermore, loans
granted by non-shareholders may be treated as shareholder loans within the meaning of
Section 135 IC if, for example, such non-shareholder is directly or indirectly controlled by a
direct or indirect shareholder of the debtor.

The claw-back provisions contained in Section 135 IC only apply in case of a corporate
debtor where none of the shareholders exposed to personal liability is an individual (Sections
135 (4), 39 (4) IC).

Additional claw-back provisions apply to transactions entered into between the insolvent
company and its silent partner (stiller Gesellschafter) (Section 136 IC) or payments by the
 11

debtor effected in the form of cheques and acceptances (Scheck- und Wechselzahlungen)
(Section 137 IC).

(b) Does your legislation differentiate between transactions (including the granting of
security) with consideration and without consideration?

Gratuitous transactions are subject to stricter claw-back rules (see Section 134 IC). Gratuitous
transactions entered into by the debtor within the last four years prior to the filing for
insolvency may be contested by the insolvency administrator without any additional
requirements. In particular, neither the illiquidity of, nor a certain intention on behalf of, the
debtor at the time of the transaction is required nor a certain form of knowledge on behalf of
the beneficiary.

(c) Does your legislation differentiate in the cases of security in general, between
security taken concurrently with the granting of the secured debt and security taken in a
different period of time?

The granting of security concurrently with the incurrence of the secured debt may be qualified
as a "cash transaction" (Bargeschäft) within the meaning of Section 142 IC. As such, the cash
transaction is privileged and the claw-back provisions do not apply. The only claw-back
provision that remains applicable in the case of a cash transaction is Section 133 IC (Wilful
Impairment).

A transaction is considered a cash transaction within the meaning of Section 142 IC if the
debtor receives a consideration of equal value in return for and concurrently with its own
performance (e.g. the debtor grants security for a new loan). Cash transactions are privileged
to enable the insolvent debtor to continue with its ordinary business until the insolvency
proceedings have been instituted. In addition, cash transactions are not considered to be
detrimental to the other creditors of the debtor as they do not result in a reduction of the
overall value of the debtor's estate.

(d) Are there special provisions for intra-group transactions and transactions
between related parties?

Under German insolvency law, there are no specific provisions addressing intra-group
transactions. Related parties, however, are generally presumed to be aware of the financial
situation of the debtor and thus, the threshold of meeting the conditions of claw-back
provisions that require a certain form of knowledge on behalf of the debtor's counterparty is
significantly lower compared to other parties. There is a rebuttable statutory presumption that
 12

related parties have had the required knowledge at the time of the contested transaction (see
Sections 130 (3), 131 (2) and 132 (3) IC), in which care the related parties bear the burden of
proof that they were not aware of the debtor's illiquidity, the insolvency filing or the
detrimental impact of the transaction on the position of the other creditors at the time of the
contested transaction.

Related persons with regard to corporate entities are (Section 138 (2) IC):

• members of the board of directors, members of the supervisory board, general

partners and qualified shareholders holding more than one quarter of the
debtor's share capital;
• any person or company having access to information on the financial situation
of the debtor due to a comparable corporate or contractual relationship with the
debtor;
• persons, in particular family members, having a close relationship to one of the
above persons, unless the latter is subject to a statutory duty of confidentiality.

Parent companies are usually considered related persons with regard to their subsidiaries.
Affiliated companies may be qualified as related persons within the meaning of Section 138
(2) IC.

2. Specific questions
2.1 Is claw-back subject to specific rules with respect to any type of security available
in your jurisdiction? If so, please describe any such rules.

With the exception of Section 88 IC, there are no specific claw-back provisions with regard to
specific types of security. Under Section 88 IC, security interests acquired by way of taking
enforcement measures vis-à-vis the debtor are invalid upon the institution of the insolvency
proceedings, provided that the relevant security interest was acquired within the last month
prior to the filing for insolvency or thereafter. Section 88 IC does not apply to security
interests created by contractual agreement or security interests arising by operation of law
outside of an enforcement scenario.
 13

2.2 Are there any total or partial exemptions from claw-back, depending on (for
example):

(a) The type of security;

Under certain circumstances, specific financial security interests, such as pledges on securities
or money market instruments, are exempt from claw-back pursuant to Section 130 (1)
sentence 2 IC. However, this exemption has a very limited scope and solely applies to
financial institutions, including public entities, and their corporate business partners.
Individuals, partnerships (Personengesellschaften) and sole proprietors are not eligible to
grant or to take financial security interests (see Section 1 (17) of the German Banking Act and
Art. 1 para. 2 (e) of the EU Directive 2002/47/EC).

(b) The type of transaction secured (including its legal form);

As mentioned above (see question 1.4 (c)), cash transactions are generally exempt from claw-
back (Section 142 IC).

(c) The type of (wider) transaction within which the financing is granted and
the relevant security is taken (e.g., financings granted in the context of certain
reorganisation proceedings);

Apart from the privilege for cash transactions (see question 1.4 (c)), transactions and related
security interests in the context of reorganisation proceedings are generally not exempt from
claw-back.

Transactions by which security or satisfaction is granted for a shareholder loan may, however,
be exempt from claw-back under Section 135 IC if the relevant shareholder has acquired its
shares in the debtor with the intention to facilitate the debtor's restructuring (Sections 135 (4),
39 (4) IC). Only new shareholders may benefit from the relevant exemption, i.e. the
acquisition of additional shares by an existing shareholder, even if accompanied by its
intention to rehabilitate the debtor, does not qualify for the exemption. In addition, it is a
requirement for the exemption to apply that, at the time of the acquisition of the shares, a
successful restructuring of the debtor must be possible and the implementation of the
contemplated restructuring measures must, from an objective perspective, be suitable to allow
for a successful reorganisation of the debtor. If these conditions are met, all loans granted by
the relevant shareholder will be exempt from claw-back pursuant to Section 135 (4) IC. Other
claw-back provisions, however, may continue to apply.
 14

(d) The nature of the grantor of security;

No.

(e) The nature of the beneficiary of security;

No.

2.3 How does your legal system address the claw-back of quasi-security transactions,
e.g. a sale of a property in return for a price payable in instalments may hide a financing
transaction secured by the property; which legal regime applies in this case: that of the
claw-back of security, or that of the termination of pending (sale and purchase)
agreements?

With respect to quasi-security transactions, the legal analysis will depend on the
circumstances of each individual case. Where a sale and purchase agreement has not yet been
fully performed by either party, the insolvency administrator will have the choice to either
continue to demand performance of the transaction or to reverse it (Section 103 IC). Where
one of the parties to the transaction or both parties have fully performed their obligations
thereunder prior to the institution of the insolvency proceedings, Section 103 IC no longer
applies. The insolvency administrator, however, will be entitled to claw-back if the relevant
transaction is found to be detrimental to the interests of the insolvency creditors and all
further conditions of one of the claw-back rules under Sections 130 et seqq. IC are met.

In general, the above rules also apply should a court find that the sale of the property is in
substance to be qualified as a secured financing transaction. To the extent advances have been
made by the lender prior to the institution of the insolvency proceedings, the transaction will
be deemed performed on behalf of such lender; to such extent, Section 103 IC no longer
applies (Section 108 (2) IC). In this case, the "quasi-security" granted by the debtor will
remain valid and continue to secure the repayment claim of the lender. Yet the granting of the
security may still be voidable under the claw-back provisions of Sections 130 et seqq. IC,
provided that the relevant conditions are met.

2.4 What are the legal consequences of the claw-back for the parties involved? For
example:

(a) Is an agreement, deed or transaction subject to "claw-back" invalid or

just ineffective between the debtor and the party to the agreement;

The details of the legal consequences of a successful claw-back in respect of a contested

transaction are not entirely clear in German law. However, according to the majority view of
 15

legal authors and experts, the contested transaction as such remains valid though the
insolvency administrator is entitled to request that all benefits the creditor has received in
connection with the transaction be returned to the estate.

(b) To what extent can claw-back affect the successful exercise or enforcement
of security rights as may have occurred prior to the adjudication in bankruptcy
(e.g. claims cashed by the secured lender under a security assignment of
receivables prior to the adjudication in bankruptcy)? Is there a difference
between the case of "self-enforcing" security (e.g., the cashing of claims referred
to above) and a court-driven enforcement (e.g., the enforcement of a mortgage)?

Security interests acquired by way of enforcement or by actions for which a court order or
other executable deed (Vollstreckungstitel) has previously been obtained are governed by the
claw-back provisions in the same manner as consensual transactions between the debtor and a
creditor (Section 141 IC).

If the creditor has obtained a security interest prior to the opening of the insolvency
proceedings, neither such security interest nor the proceeds generated from its realisation are
subject to the claw-back regime of German insolvency law. Even voluntary payments made
by the debtor shortly before the opening of the insolvency proceedings to a creditor holding
such a security interest are not subject to claw-back provided that the value of the security is
equal to or higher than the principal amount of the repaid secured claim. In such a scenario,
the insolvency creditors do not suffer any harm because the estate is re-enhanced by the value
of the security in exchange for the debtor's payments.

2.5 What are the rights of the parties involved once the claw-back had been enforced
(as a result of operation of law or court ruling)?

As mentioned above (see question 2.4(a)), upon a successful claw-back, the insolvency
administrator is entitled to request that whatever benefit the creditor has received in
connection with the transaction be returned to the estate (Section 143 (1) IC). For example,
where the grant of security has been successfully contested, the insolvency administrator
could require the creditor to waive its security rights and to re-transfer or re-assign the
collateral.

Where a creditor had to return amounts received from the debtor on account of a claim, it
becomes re-entitled to the relevant claim which is reinstated by operation of law (see Section
144 (1) IC). The creditor may seek satisfaction as an insolvency creditor in the course of the
insolvency proceedings.
 16

Furthermore, any consideration granted by the creditor to the debtor in connection with the
contested transaction has to be returned, provided that such consideration continues to exist as
an identifiable item within the debtor's estate or continues to enrich the estate (Section 144 (2)
IC). In all other cases, the creditor is limited to pursue its claim for restitution as an
insolvency creditor in the course of the insolvency proceedings.

2.6 What is the claw-back regime for security granted by third parties/in respect of
third party indebtedness? Please analyse from the perspective of the insolvency of the
debtor and of the insolvency of the third party grantor of security. Does the possibility
for the third party grantor to act in recourse against the insolvent debtor make a
difference?

I. Insolvency of Third Party Grantor of Security

a. Claw-back vis-à-vis the Third Party Debtor. The insolvency administrator

may contest the grant of the security interest by the insolvent debtor vis-à-vis the third party
debtor if the insolvency creditors are adversely affected by the grant of such security interest.
Such adverse effect will usually be found if the insolvent debtor / security provider is not
entitled to claim recourse from the third party debtor for whose obligations the security has
been granted or if such recourse claim is without value. In this scenario, the insolvency
administrator may be entitled to request compensation pursuant to Section 134 IC provided
that the grant of the security interest was accompanied by a joint understanding between the
security provider and the third party debtor that the security provider waives its claim for
recourse or that such recourse would be of no value for the security provider. In the absence
of such understanding between the parties, the transaction may be voidable only pursuant to
Section 133 IC (Wilful Impairment) if the parties acted in bad faith with the intention to harm
the creditors of the security provider.

b. Claw-back vis-à-vis the Secured Creditor. The insolvency administrator may

attempt to contest the grant of security vis-à-vis the secured creditor. According to the
majority view in German law, Sections 130 and 131 IC would not be applicable because
arguably the relevant provisions address exclusively transactions between the insolvent debtor
and its own creditors. Regardless of whether Sections 130 and 131 IC apply, it is the common
view that the grant of security for the obligations of another may be subject to claw-back vis-
à-vis the secured creditor under Section 133 IC (Wilful Impairment) or Section 134 IC
(Gratuitous Benefit).

II. Insolvency of the Debtor

 17

A security interest granted by a third party to secure indebtedness of the insolvent debtor is
usually not detrimental to other insolvency creditors even if the security provider has a
recourse claim against the debtor. The recourse claim of the security provider replaces the
claim of the relevant secured creditor once the latter has received satisfaction of its claims
against the insolvent debtor either from the proceeds of realisation of the security or through
pay-off by the security provider seeking to avoid enforcement of the security granted by it.
However, a detrimental effect for the other insolvency creditors may be found if the security
provider (other than the creditor whose claim has been satisfied by it) has been granted
security by the insolvent debtor for its recourse claim on other property of the insolvent
debtor so that the security provider is in a position to seek satisfaction of its recourse claim
against the debtor from the proceeds of the realisation of such security on a priority basis.

2.7 What is the claw-back regime for security which has been agreed (i.e. the
relevant security agreement has been executed) but not yet perfected at the time of the
adjudication in bankruptcy of the debtor/grantor?

The point in time as of which a transaction is legally deemed to have taken place is relevant in
the claw-back context. It determines whether the relevant transaction is void because it was
carried out when the debtor no longer had the power to dispose over its assets (i.e. after the
opening of insolvency proceedings, see Sections 80, 81, 91 IC and question 1.4 (a) above) or
whether the transaction as such is valid subject only to a potential right of claw-back by the
insolvency administrator. Under German law, a transaction is deemed to take place at the
point in time in which it becomes legally effective (Section 140 (1) IC). Consequently, the
general rule is that all elements of the transaction, including any applicable perfection
formalities, must be satisfied prior to the institution of the insolvency proceedings lest the
transaction is deemed void (Section 91 (1) IC). However, the following exceptions apply:

a. Transactions Subject to Further Conditions. If a transaction is subject to a

further contractual condition precedent in the form of an uncertain future event, the
transaction is deemed completed at the time the relevant agreement is entered into (Sections
140 (3), 191 IC). However, the accrual of the right that forms the object of the relevant
transaction or agreement (e.g. assignment of future claims) does not constitute such a
condition. Claims falling due on a specified future date, on the other hand, are treated as valid,
present claims in the course of the insolvency proceedings.

b. Security Requiring Registration. Another exception applies to security

interests which require official registration (e.g. mortgages and land charges). Under German
law, security interests requiring registration are deemed to have been validly created for
insolvency purposes once:
 18

• all other conditions of the transaction apart from the registration requirement
have been fulfilled;
• the security agreement has been irrevocably entered into by the security
provider; and
• the creditor has filed for registration of the security with the competent
register.

If all of the above requirements are met prior to the institution of the insolvency proceedings,
the creditor will acquire a valid security interest upon registration even if such registration
occurs after the insolvency proceedings have been commenced (Section 140 (2) IC).
However, the relevant security interest might still be subject to claw-back by the insolvency
administrator.

Frankfurt am Main, May 2012

Contact:

Dr. Dirk H. Bliesener, LL.M. (Yale)

Rechtsanwalt, Attorney-at-Law (New York)
Partner
HENGELER MUELLER
Partnerschaft von Rechtsanwälten
Bockenheimer Landstraße 24
60323 Frankfurt am Main
Germany

Office +49 69 17095559

Mobile +49 1733221515
Facsimile +49 69 170957558
Email dirk.bliesener@hengeler.com
www.hengeler.com
 Claw-back of Security in Insolvency

The following analysis is for informational purposes only and does not constitute
legal advice by HENGELER MUELLER Partnerschaft von Rechtsanwälten.

1. Introductory questions

1.1 Please briefly describe the main type of security in your jurisdiction (per type of
asset; per perfection technique; per type of secured obligation).

I. Security Interests in Property (Realsicherheiten) vs. Personal Security

Interests (Personalsicherheiten)

In German law, security interests are commonly divided into two main categories: security
interests in property and personal security interests.

a. Security Interests in Property (Realsicherheiten). Security interests in

property relate to a specific tangible or intangible asset of the security provider that shall
become liable for the secured debt. They include security interests with respect to the
following types of assets:

(i) Real Estate. A creditor may take security over real estate in the form of
a mortgage (Hypothek, Sections 1113 to 1190 of the German Civil Code (Bürgerliches
Gesetzbuch), the "BGB") or a land charge (Grundschuld, Sections 1191 to 1198
BGB). Other forms of security over real estate include rent charges (Rentenschuld,
Sections 1199 to 1203 BGB) and annuity land charges (Reallast, Sections 1105 to
1112 BGB).

(ii) Moveable Assets. Debt can also be secured by way of a transfer of title
for security purposes in respect of moveable assets where the security provider may (if
desired) retain possession of the assets (Sicherungsübereignung, Sections 929 sentence
1 and 930 BGB). German law also recognises retention of title arrangements
 2

(Eigentumsvorbehalt) by which the seller or supplier of a certain asset delivered to the

purchaser retains title to such asset until the purchase price has been paid (Section 449
BGB).

In addition, the creditor of a claim and the security provider may agree on the creation
of a pledge over the moveable asset in favour of the creditor (Pfandrecht an
beweglichen Sachen, Sections 1204 to 1259 BGB).

Specific provisions apply to security granted over ships and aircraft in the form of ship
mortgages (Schiffshypothek, Sections 24 to 81a of the Act on Rights over Registered
Ships and Ships under Construction) and registered liens on aircraft
(Registerpfandrecht an Luftfahrzeugen, Sections 1 to 74 of the Act on Rights in
Aircraft).

(iii) Intangible Assets. Intangible assets such as rights and claims can be
utilised as security either by way of a security assignment (Sicherungsabtretung,
Sections 398, 413 BGB) or by way of a pledge of rights (Pfandrecht an Rechten,
Sections 1273 to 1296 BGB).

b. Personal Security Interests (Personalsicherheiten). Personal security

interests are agreements by which a person promises the creditor of a third party to become
liable for the performance of the third party's obligation. Personal security interests may take
various forms, including a suretyship (Bürgschaft, Section 765 BGB), guarantee (Garantie),
additional assumption of debt (Schuldbeitritt) or abstract acknowledgement of debt
(abstraktes Schuldversprechen, Sections 780, 781 BGB).

II. Accessory Security vs. Non-Accessory Security

In German law, security interests are either accessory or non-accessory in nature. Accessory
security interests are closely linked to, and share the fate of, the underlying secured claim.
Consequently, accessory security interests do not come into existence without a valid secured
claim and cease to exist, by operation of law, as soon as the relevant secured claim has been
extinguished. Furthermore, accessory security interests will be automatically transferred
together with the underlying secured claim and cannot be separately transferred.

Non-accessory security interests, on the other hand, are independent of the underlying secured
claim. Consequently, they are more flexible from the perspective of the secured creditor. In
particular, the abstract nature of non-accessory security interests allows for their re-utilisation
 3

for purposes other than the original security purpose. Non-accessory security interests need to
be re-transferred or re-assigned to the relevant security provider and do not automatically
lapse upon extinguishment of the underlying secured claim.

Mortgages and pledges are accessory security interests, whereas assignments and transfers for
security purposes as well as land charges belong to the group of non-accessory security
interests.

III. Perfection Techniques

Different perfection requirements apply to the various forms of security interests. In all cases
where security is being granted on a consensual basis, the creditor and the security provider
need to enter into an agreement providing for the creation of the relevant security. Usually,
the relevant security agreement is not subject to a specific form requirement. Exceptions to
this general rule include the surety and the abstract acknowledgement of debt where the
declaration of the security provider must be made in writing (Sections 780, 781 and 766
BGB). The granting of pledges over shares held in a German limited liability company needs
to be notarised (Section 15 (3) of the German Limited Liability Companies Act in conjunction
with Section 1274 BGB).

Depending on the type of security being taken, additional requirements need to be met to
establish the relevant security interest: Security taken over real estate, including mortgages
and land charges, needs to be registered with the competent land register. Pledges over
moveable assets require transfer of possession in respect of the collateral to the creditor
whereas pledges over rights and claims generally need to be notified vis-à-vis the third party
debtor (e.g. the debtor of a payment claim or, in case of a pledge over shares, the company the
shares of which are being pledged) (Section 1280 BGB). No transfer of possession is required
if title to a moveable asset is transferred to the creditor for security purposes which is why in
practice security transfer agreements are frequently preferred to pledges. Similarly, security
assignments of rights and claims do not require notification of the third party debtor in order
to become valid as between the security provider and the creditor. However, prior to
disclosure of the assignment vis-à-vis the third party debtor, the bona fide third party debtor
benefits from certain statutory protections including, in particular, the right to perform its
obligations vis-à-vis the original creditor with effect also vis-à-vis the assignee (Section 407
BGB).
 4

1.2. Please briefly describe whether your jurisdiction provides for a procedure of
protection against creditors (usually initiated by a debtor at a time when the debtor is
yet not insolvent) and if so what are the basic assumptions.

Before a debtor is illiquid or over-indebted (see question 1.3), the debtor may file for
insolvency if it can show that its illiquidity is imminent (see Section 18 (1) of the German
Insolvency Code (Insolvenzordnung), the "IC").

Pursuant to the Act on Further Facilitation of the Reorganisation of Companies (Gesetz zur
weiteren Erleichtung der Sanierung von Unternehmen – ESUG), which came into force in
March 2012, a new procedure was introduced for the protection of debtors who voluntarily
file for insolvency. Under the new "protective shield procedure" (Schutzschirmverfahren), the
debtor may request a time period of up to three months during which enforcement actions of
individual creditors are stayed to provide the debtor with the opportunity to develop an
insolvency plan. The insolvency court (Insolvenzgericht) may order such procedure if the
following requirements are met pursuant to Section 270b IC: (1) the debtor has voluntarily
filed for insolvency and applied for self-administration of its estate, (2) the illiquidity of the
debtor is imminent or the debtor is over-indebted (but the debtor is not yet illiquid), (3) a
successful reorganisation of the debtor is not obviously hopeless and (4) an expert on
insolvency matters has confirmed (2) and (3).

In 2010, the German legislator adopted a special recovery and reorganisation regime with
regard to financial institutions under the Bank Reorganisation Act (Gesetz zur Reorganisation
von Kreditinstituten or KredReorgG) providing for limited creditor protection at an early
stage.

1.3. Please briefly describe the types of insolvency proceedings contemplated by your
legislation (liquidatory proceedings; reorganisation or recovery proceedings).

I. Reasons for the Institution of Insolvency Proceedings (Insolvenzgründe)

Under the German Insolvency Code, insolvency proceedings may be instituted on the basis of
the following grounds:

a. Illiquidity (Section 17 IC). The debtor is illiquid within the meaning of

Section 17 IC if it is unable to pay its debts as and when they fall due. German courts have
held that minor delays in paying outstanding debt not exceeding 10% of the aggregate amount
of due debt do not necessarily render a debtor illiquid, depending on the circumstances of the
 5

individual case. However, a debtor will be considered illiquid if it has generally stopped to
make payments.

b. Over-indebtedness (Section 19 IC). With respect to legal entities only,

insolvency proceedings may be instituted on the basis of the debtor’s over-indebtedness
(Section 19 IC). A debtor is over-indebted if: (1) the debtor's liabilities exceed the value of its
assets and (2) in the given circumstances continuation of the debtor's enterprise is less likely
than a shutdown (negative Fortführungsprognose). The second requirement has been
temporarily introduced by the German legislator during the financial crisis of 2008. With
effect as from January 2014, the second requirement will cease to apply, subject to further
amendment of the Insolvency Code.

c. Imminent Illiquidity (Section 18 IC). Finally, a debtor may apply for the
institution of insolvency proceedings if its illiquidity is imminent. Illiquidity is imminent if
the probability that the debtor will be unable to pay its debts as and when they fall due is
greater than the probability that its debts will be paid within the foreseeable future.

II. Receivership versus Self-Administration

After insolvency proceedings have been commenced by the competent insolvency court, in
most cases an insolvency administrator (Insolvenzverwalter) will be appointed to take
possession of, and administer, the estate. Prior to the official institution of the insolvency
proceedings, the insolvency court may appoint a preliminary insolvency administrator if it
deems such appointment necessary in order to protect the value of the estate (see Section 21
IC). In accordance with Section 56a IC, the preliminary creditors' committee (vorläufiger
Gläubigerausschuss) is entitled to suggest a candidate for the position of the insolvency
administrator.The insolvency court will be bound by the suggestion of the preliminary
creditors' committee if its candidate is qualified for the function and has been nominated
unanimously. However, it has to be noted that a creditors’ committee will not exist in all
instances. In particular, a creditors' committee will not be established if the enterprise of the
debtor has been shut down, if it seems unreasonable to do so in the light of the size of the
debtor's estate or if the delay caused by the composition of the creditors' committee would
have a detrimental effect on the financial situation of the debtor (Section 22a (3) IC).

In carrying out its rights and duties, the insolvency administrator is subject to the supervision
of the competent insolvency court, the creditors' committee (Gläubigerausschuss), if any, as
well as the creditors' assembly (Gläubigerversammlung).
 6

Alternatively, the insolvency court may – upon request of the debtor – order that the estate
shall remain in the possession of, and be administered by, the debtor itself (debtor-in-
possession proceedings, Eigenverwaltung, Sections 270 et seqq. IC). Such self-administration
by the debtor, however, is supervised by an administrator (Sachwalter), the insolvency court,
the creditors' committee, if any, as well as the creditors' assembly.

III. Types of Insolvency Proceedings

Satisfaction of creditors' claims may be achieved in insolvency proceedings either by

liquidation of the debtor's estate and subsequent distribution of the liquidation proceeds
amongst the creditors or through implementation of an agreed insolvency plan which allows
for a more flexible handling of the insolvency proceedings. Frequently, an insolvency plan
seeks to achieve a successful restructuring of the debtor. However, the insolvency plan may
instead provide for the liquidation of the debtor and the subsequent distribution of proceeds
among the creditors.

a. Standard Procedure. Where the insolvency proceedings aim at a straight-

forward liquidation of the debtor in accordance with the provisions of German insolvency
law, such liquidation may take place either in the form of a shut down of the enterprise and
subsequent sale of the various assets of the debtor's estate or by a sale of the debtor's
enterprise as a going concern (übertragende Sanierung). Typically, a going concern sale of
the debtor's enterprise is preferred to a piecemeal sale of the various assets of the estate as it is
presumed to generate higher proceeds.

b. Insolvency Plan (Insolvenzplan). The insolvency administrator or the debtor-

in-possession may, in cooperation with the creditors, develop and implement an insolvency
plan (Insolvenzplan). In insolvency plan proceedings, the parties have the opportunity to agree
on various measures to be taken in the course of the insolvency proceedings.

Prior to confirmation by the insolvency court, the plan needs to receive the consent of the
debtor and the creditors (Section 248 (1) IC). For the purpose of voting on the insolvency
plan, the creditors are divided into classes based on their legal position and economic interest
(see Sections 222, 243 IC). Secured creditors and unsecured creditors for example are to be
placed into separate classes. A class has granted its consent to the insolvency plan if the
majority of its members has voted in its favour and such majority holds more than 50% of the
aggregate principal amount of all claims held by all members of the class.
 7

The insolvency plan must obtain the consent of all classes of creditors. However, a class that
has refused its approval will be deemed to have approved the plan if (i) the position of the
members of the class under the plan is presumably not worse than without the plan, (ii) the
members of each class obtain a share, in a reasonable manner, of the value to be distributed
under the plan and (iii) the majority of classes has voted in favour of the plan (cram-down,
Section 245 IC).

Since March 2012, shareholders are also involved in an insolvency plan procedure (see
Sections 225a, 238a and 246a IC) in order to facilitate the implementation of a financial
restructuring that requires the cooperation of shareholders (in particular, debt to equity
swaps). Shareholders vote on the insolvency plan in classes and may be crammed down in a
similar manner as creditors.

c. Discharge of Residual Debt (Restschuldbefreiung). The procedure leading to

the discharge of liabilities remaining after insolvency proceedings is available only to
individual debtors. The individual debtor may obtain a discharge from all of its obligations
vis-à-vis its insolvency creditors that remained outstanding after completion of the insolvency
proceedings provided that the debtor has, for a period of six years, transferred all of its
seizable income to an insolvency trustee for distribution among the creditors.

d. Other. Special rules apply with respect to the insolvency of consumers

(Verbraucherinsolvenzverfahren) and small insolvency estates (Kleinverfahren) (see Sections
304 et seqq. IC). In addition, the German Insolvency Code provides for specific insolvency
proceedings with respect to a deceased person's estate (Nachlassinsolvenzverfahren, Sections
315 et seqq. IC).

1.4. Please briefly describe the types of claw-back actions available in your
jurisdiction. Please address, in particular, any of the following questions:

(a) Is claw-back automatic or does it require a positive assessment of the existence of

the relevant conditions by the court or receiver?

I. General

As a general rule, transactions relating to the debtor's estate entered into with the debtor after
the institution of the insolvency proceedings are invalid by operation of law (see Sections 81
and 82 IC). Pursuant to Section 80 IC, the power to dispose over the assets of the estate
automatically shifts from the debtor to the insolvency administrator as soon as the insolvency
proceedings have been opened (except in the case of self-administration).
 8

The claw-back provisions under the German Insolvency Code apply only to transactions
entered into with the debtor during the time period prior to the filing for insolvency or the
time period between the filing and the opening of the insolvency proceedings. Consequently,
the claw-back regime depends on the point in time in which a certain legal action occurred,
e.g. a security interest was granted.

II. "Automatic" Claw-back

The German Insolvency Code provides for an automatic claw-back only with respect to
security over assets of the estate that has been acquired by a creditor through enforcement
proceedings within one month prior to the filing for insolvency or thereafter. Security
acquired by enforcement during that time period becomes automatically invalid upon the
subsequent institution of insolvency proceedings (Section 88 IC). The automatic claw-back
does not apply to security interests acquired outside of an enforcement scenario; in particular,
it does not apply to security interests created by contractual agreement which may, however,
be subject to challenge by the insolvency administrator under one of the other claw-back
provisions described below.

III. Avoidance of Debtor Transactions (Insolvenzanfechtung)

Transactions entered into between the debtor and a creditor prior to the institution of the
insolvency proceedings that diminish the value of the estate to the detriment of the insolvency
creditors may be challenged by the insolvency administrator if certain additional conditions of
one of the following provisions are met:

a. "Congruent Coverage" (Section 130 IC). Transactions providing the creditor

with security or satisfaction for its claims may be challenged if:

• the relevant transaction was entered into within three months prior to the filing
for insolvency, the debtor, at the time of the transaction, had already been
illiquid and the creditor had positive knowledge thereof (Section 130 (1) No. 1
IC); or

• the relevant transaction was entered into after the filing for insolvency and, at
the time of the transaction, the creditor had positive knowledge of the debtor's
illiquidity or of the fact that an application for the opening of insolvency
proceedings had previously been filed (Section 130 (1) No. 2).
 9

b. "Incongruent Coverage" (Section 131 IC). Transactions providing the

creditor with security or satisfaction for its claims to which the creditor was not entitled at that
time or not in that manner are subject to claw-back if:

• the relevant transaction was entered into during the last month preceding the
filing for insolvency or thereafter (Section 131 (1) No. 1); or

• the relevant transaction was entered into during the second or third month prior
to the filing for insolvency and the debtor, at the time of the transaction, was
already illiquid (Section 131 (1) No. 2); or

• the relevant transaction was entered into during the second or third month prior
to the filing for insolvency and the creditor, at the time of the transaction, had
positive knowledge that the transaction was detrimental to the insolvency
creditors (Section 131 (1) Nr. 3 IC).

c. Transactions Directly Impairing Other Creditors (Section 132 IC). In

addition, transactions by the debtor entered into with a creditor that is not already voidable
under the more specific Sections 130 and 131 IC described above are subject to claw-back if:

• the relevant transaction was entered into during the last three months prior to
the filing for insolvency or thereafter, the debtor, at the time of the transaction,
was already illiquid and the other party had positive knowledge thereof
(Section 132 (1) No. 1 IC); or

• the relevant transaction was entered into after the filing for insolvency and, at
the time of the transaction, the creditor had positive knowledge of the debtor's
illiquidity or of the fact that an application for the institution of insolvency
proceedings had been filed (Section 132 (1) No. 2 IC);

and the relevant transaction has caused a direct harm to the insolvency creditors.

In light of the above provisions, the most critical time period from a claw-back perspective is
the time period starting three months prior to the filing for insolvency and ending with the
institution of insolvency proceedings. However, longer periods of up to ten years apply to
certain transactions.
 10

d. Wilful Impairment (Section 133 IC). Transactions entered into during the last
ten years prior to the filing for insolvency or thereafter may be contested by the insolvency
administrator if the debtor, when carrying out the relevant transaction, acted in bad faith with
the intention to harm its creditors and the other party to the transaction was aware of the
debtor's intention (Section 133 (1) IC).

Furthermore, a transaction detrimental to the position of the insolvency creditors entered into
between the debtor and a closely related person is also challengeable, unless the transaction
took place more than two years prior to the filing for insolvency or the closely related person
was unaware of the intention of the debtor to discriminate its other creditors (Section 133 (2)
IC).

e. Gratuitous Benefits (Section 134 IC). Gratuitous benefits granted by the

debtor may be contested by the insolvency administrator if granted within four years prior to
the filing for insolvency (Section 134 IC).

f. Claw-back Provisions in Relation to Shareholder Loans (Section 135 IC)

and Other Specific Claw-back Provisions. Specific claw-back provisions apply to
transactions entered into between the debtor and its (direct or indirect) shareholder in
connection with shareholder loans.

Pursuant to Section 135 (1) IC, transactions by which security or satisfaction is being granted
for loan repayment claims of a shareholder (or an economically comparable claim) are subject
to challenge if, in the case of security, the relevant transaction took place during the last ten
years prior to the filing for insolvency or, in the case of satisfaction being granted, the
relevant transaction took place within one year prior to the filing for insolvency. The same
rules apply to transactions having a similar economic effect (e.g. payments by the debtor to a
creditor whose claim is secured by security granted by the shareholder). Furthermore, loans
granted by non-shareholders may be treated as shareholder loans within the meaning of
Section 135 IC if, for example, such non-shareholder is directly or indirectly controlled by a
direct or indirect shareholder of the debtor.

The claw-back provisions contained in Section 135 IC only apply in case of a corporate
debtor where none of the shareholders exposed to personal liability is an individual (Sections
135 (4), 39 (4) IC).

Additional claw-back provisions apply to transactions entered into between the insolvent
company and its silent partner (stiller Gesellschafter) (Section 136 IC) or payments by the
 11

debtor effected in the form of cheques and acceptances (Scheck- und Wechselzahlungen)
(Section 137 IC).

(b) Does your legislation differentiate between transactions (including the granting of
security) with consideration and without consideration?

Gratuitous transactions are subject to stricter claw-back rules (see Section 134 IC). Gratuitous
transactions entered into by the debtor within the last four years prior to the filing for
insolvency may be contested by the insolvency administrator without any additional
requirements. In particular, neither the illiquidity of, nor a certain intention on behalf of, the
debtor at the time of the transaction is required nor a certain form of knowledge on behalf of
the beneficiary.

(c) Does your legislation differentiate in the cases of security in general, between
security taken concurrently with the granting of the secured debt and security taken in a
different period of time?

The granting of security concurrently with the incurrence of the secured debt may be qualified
as a "cash transaction" (Bargeschäft) within the meaning of Section 142 IC. As such, the cash
transaction is privileged and the claw-back provisions do not apply. The only claw-back
provision that remains applicable in the case of a cash transaction is Section 133 IC (Wilful
Impairment).

A transaction is considered a cash transaction within the meaning of Section 142 IC if the
debtor receives a consideration of equal value in return for and concurrently with its own
performance (e.g. the debtor grants security for a new loan). Cash transactions are privileged
to enable the insolvent debtor to continue with its ordinary business until the insolvency
proceedings have been instituted. In addition, cash transactions are not considered to be
detrimental to the other creditors of the debtor as they do not result in a reduction of the
overall value of the debtor's estate.

(d) Are there special provisions for intra-group transactions and transactions
between related parties?

Under German insolvency law, there are no specific provisions addressing intra-group
transactions. Related parties, however, are generally presumed to be aware of the financial
situation of the debtor and thus, the threshold of meeting the conditions of claw-back
provisions that require a certain form of knowledge on behalf of the debtor's counterparty is
significantly lower compared to other parties. There is a rebuttable statutory presumption that
 12

related parties have had the required knowledge at the time of the contested transaction (see
Sections 130 (3), 131 (2) and 132 (3) IC), in which care the related parties bear the burden of
proof that they were not aware of the debtor's illiquidity, the insolvency filing or the
detrimental impact of the transaction on the position of the other creditors at the time of the
contested transaction.

Related persons with regard to corporate entities are (Section 138 (2) IC):

• members of the board of directors, members of the supervisory board, general

partners and qualified shareholders holding more than one quarter of the
debtor's share capital;
• any person or company having access to information on the financial situation
of the debtor due to a comparable corporate or contractual relationship with the
debtor;
• persons, in particular family members, having a close relationship to one of the
above persons, unless the latter is subject to a statutory duty of confidentiality.

Parent companies are usually considered related persons with regard to their subsidiaries.
Affiliated companies may be qualified as related persons within the meaning of Section 138
(2) IC.

2. Specific questions
2.1 Is claw-back subject to specific rules with respect to any type of security available
in your jurisdiction? If so, please describe any such rules.

With the exception of Section 88 IC, there are no specific claw-back provisions with regard to
specific types of security. Under Section 88 IC, security interests acquired by way of taking
enforcement measures vis-à-vis the debtor are invalid upon the institution of the insolvency
proceedings, provided that the relevant security interest was acquired within the last month
prior to the filing for insolvency or thereafter. Section 88 IC does not apply to security
interests created by contractual agreement or security interests arising by operation of law
outside of an enforcement scenario.
 13

2.2 Are there any total or partial exemptions from claw-back, depending on (for
example):

(a) The type of security;

Under certain circumstances, specific financial security interests, such as pledges on securities
or money market instruments, are exempt from claw-back pursuant to Section 130 (1)
sentence 2 IC. However, this exemption has a very limited scope and solely applies to
financial institutions, including public entities, and their corporate business partners.
Individuals, partnerships (Personengesellschaften) and sole proprietors are not eligible to
grant or to take financial security interests (see Section 1 (17) of the German Banking Act and
Art. 1 para. 2 (e) of the EU Directive 2002/47/EC).

(b) The type of transaction secured (including its legal form);

As mentioned above (see question 1.4 (c)), cash transactions are generally exempt from claw-
back (Section 142 IC).

(c) The type of (wider) transaction within which the financing is granted and
the relevant security is taken (e.g., financings granted in the context of certain
reorganisation proceedings);

Apart from the privilege for cash transactions (see question 1.4 (c)), transactions and related
security interests in the context of reorganisation proceedings are generally not exempt from
claw-back.

Transactions by which security or satisfaction is granted for a shareholder loan may, however,
be exempt from claw-back under Section 135 IC if the relevant shareholder has acquired its
shares in the debtor with the intention to facilitate the debtor's restructuring (Sections 135 (4),
39 (4) IC). Only new shareholders may benefit from the relevant exemption, i.e. the
acquisition of additional shares by an existing shareholder, even if accompanied by its
intention to rehabilitate the debtor, does not qualify for the exemption. In addition, it is a
requirement for the exemption to apply that, at the time of the acquisition of the shares, a
successful restructuring of the debtor must be possible and the implementation of the
contemplated restructuring measures must, from an objective perspective, be suitable to allow
for a successful reorganisation of the debtor. If these conditions are met, all loans granted by
the relevant shareholder will be exempt from claw-back pursuant to Section 135 (4) IC. Other
claw-back provisions, however, may continue to apply.
 14

(d) The nature of the grantor of security;

No.

(e) The nature of the beneficiary of security;

No.

2.3 How does your legal system address the claw-back of quasi-security transactions,
e.g. a sale of a property in return for a price payable in instalments may hide a financing
transaction secured by the property; which legal regime applies in this case: that of the
claw-back of security, or that of the termination of pending (sale and purchase)
agreements?

With respect to quasi-security transactions, the legal analysis will depend on the
circumstances of each individual case. Where a sale and purchase agreement has not yet been
fully performed by either party, the insolvency administrator will have the choice to either
continue to demand performance of the transaction or to reverse it (Section 103 IC). Where
one of the parties to the transaction or both parties have fully performed their obligations
thereunder prior to the institution of the insolvency proceedings, Section 103 IC no longer
applies. The insolvency administrator, however, will be entitled to claw-back if the relevant
transaction is found to be detrimental to the interests of the insolvency creditors and all
further conditions of one of the claw-back rules under Sections 130 et seqq. IC are met.

In general, the above rules also apply should a court find that the sale of the property is in
substance to be qualified as a secured financing transaction. To the extent advances have been
made by the lender prior to the institution of the insolvency proceedings, the transaction will
be deemed performed on behalf of such lender; to such extent, Section 103 IC no longer
applies (Section 108 (2) IC). In this case, the "quasi-security" granted by the debtor will
remain valid and continue to secure the repayment claim of the lender. Yet the granting of the
security may still be voidable under the claw-back provisions of Sections 130 et seqq. IC,
provided that the relevant conditions are met.

2.4 What are the legal consequences of the claw-back for the parties involved? For
example:

(a) Is an agreement, deed or transaction subject to "claw-back" invalid or

just ineffective between the debtor and the party to the agreement;

The details of the legal consequences of a successful claw-back in respect of a contested

transaction are not entirely clear in German law. However, according to the majority view of
 15

legal authors and experts, the contested transaction as such remains valid though the
insolvency administrator is entitled to request that all benefits the creditor has received in
connection with the transaction be returned to the estate.

(b) To what extent can claw-back affect the successful exercise or enforcement
of security rights as may have occurred prior to the adjudication in bankruptcy
(e.g. claims cashed by the secured lender under a security assignment of
receivables prior to the adjudication in bankruptcy)? Is there a difference
between the case of "self-enforcing" security (e.g., the cashing of claims referred
to above) and a court-driven enforcement (e.g., the enforcement of a mortgage)?

Security interests acquired by way of enforcement or by actions for which a court order or
other executable deed (Vollstreckungstitel) has previously been obtained are governed by the
claw-back provisions in the same manner as consensual transactions between the debtor and a
creditor (Section 141 IC).

If the creditor has obtained a security interest prior to the opening of the insolvency
proceedings, neither such security interest nor the proceeds generated from its realisation are
subject to the claw-back regime of German insolvency law. Even voluntary payments made
by the debtor shortly before the opening of the insolvency proceedings to a creditor holding
such a security interest are not subject to claw-back provided that the value of the security is
equal to or higher than the principal amount of the repaid secured claim. In such a scenario,
the insolvency creditors do not suffer any harm because the estate is re-enhanced by the value
of the security in exchange for the debtor's payments.

2.5 What are the rights of the parties involved once the claw-back had been enforced
(as a result of operation of law or court ruling)?

As mentioned above (see question 2.4(a)), upon a successful claw-back, the insolvency
administrator is entitled to request that whatever benefit the creditor has received in
connection with the transaction be returned to the estate (Section 143 (1) IC). For example,
where the grant of security has been successfully contested, the insolvency administrator
could require the creditor to waive its security rights and to re-transfer or re-assign the
collateral.

Where a creditor had to return amounts received from the debtor on account of a claim, it
becomes re-entitled to the relevant claim which is reinstated by operation of law (see Section
144 (1) IC). The creditor may seek satisfaction as an insolvency creditor in the course of the
insolvency proceedings.
 16

Furthermore, any consideration granted by the creditor to the debtor in connection with the
contested transaction has to be returned, provided that such consideration continues to exist as
an identifiable item within the debtor's estate or continues to enrich the estate (Section 144 (2)
IC). In all other cases, the creditor is limited to pursue its claim for restitution as an
insolvency creditor in the course of the insolvency proceedings.

2.6 What is the claw-back regime for security granted by third parties/in respect of
third party indebtedness? Please analyse from the perspective of the insolvency of the
debtor and of the insolvency of the third party grantor of security. Does the possibility
for the third party grantor to act in recourse against the insolvent debtor make a
difference?

I. Insolvency of Third Party Grantor of Security

a. Claw-back vis-à-vis the Third Party Debtor. The insolvency administrator

may contest the grant of the security interest by the insolvent debtor vis-à-vis the third party
debtor if the insolvency creditors are adversely affected by the grant of such security interest.
Such adverse effect will usually be found if the insolvent debtor / security provider is not
entitled to claim recourse from the third party debtor for whose obligations the security has
been granted or if such recourse claim is without value. In this scenario, the insolvency
administrator may be entitled to request compensation pursuant to Section 134 IC provided
that the grant of the security interest was accompanied by a joint understanding between the
security provider and the third party debtor that the security provider waives its claim for
recourse or that such recourse would be of no value for the security provider. In the absence
of such understanding between the parties, the transaction may be voidable only pursuant to
Section 133 IC (Wilful Impairment) if the parties acted in bad faith with the intention to harm
the creditors of the security provider.

b. Claw-back vis-à-vis the Secured Creditor. The insolvency administrator may

attempt to contest the grant of security vis-à-vis the secured creditor. According to the
majority view in German law, Sections 130 and 131 IC would not be applicable because
arguably the relevant provisions address exclusively transactions between the insolvent debtor
and its own creditors. Regardless of whether Sections 130 and 131 IC apply, it is the common
view that the grant of security for the obligations of another may be subject to claw-back vis-
à-vis the secured creditor under Section 133 IC (Wilful Impairment) or Section 134 IC
(Gratuitous Benefit).

II. Insolvency of the Debtor

 17

A security interest granted by a third party to secure indebtedness of the insolvent debtor is
usually not detrimental to other insolvency creditors even if the security provider has a
recourse claim against the debtor. The recourse claim of the security provider replaces the
claim of the relevant secured creditor once the latter has received satisfaction of its claims
against the insolvent debtor either from the proceeds of realisation of the security or through
pay-off by the security provider seeking to avoid enforcement of the security granted by it.
However, a detrimental effect for the other insolvency creditors may be found if the security
provider (other than the creditor whose claim has been satisfied by it) has been granted
security by the insolvent debtor for its recourse claim on other property of the insolvent
debtor so that the security provider is in a position to seek satisfaction of its recourse claim
against the debtor from the proceeds of the realisation of such security on a priority basis.

2.7 What is the claw-back regime for security which has been agreed (i.e. the
relevant security agreement has been executed) but not yet perfected at the time of the
adjudication in bankruptcy of the debtor/grantor?

The point in time as of which a transaction is legally deemed to have taken place is relevant in
the claw-back context. It determines whether the relevant transaction is void because it was
carried out when the debtor no longer had the power to dispose over its assets (i.e. after the
opening of insolvency proceedings, see Sections 80, 81, 91 IC and question 1.4 (a) above) or
whether the transaction as such is valid subject only to a potential right of claw-back by the
insolvency administrator. Under German law, a transaction is deemed to take place at the
point in time in which it becomes legally effective (Section 140 (1) IC). Consequently, the
general rule is that all elements of the transaction, including any applicable perfection
formalities, must be satisfied prior to the institution of the insolvency proceedings lest the
transaction is deemed void (Section 91 (1) IC). However, the following exceptions apply:

a. Transactions Subject to Further Conditions. If a transaction is subject to a

further contractual condition precedent in the form of an uncertain future event, the
transaction is deemed completed at the time the relevant agreement is entered into (Sections
140 (3), 191 IC). However, the accrual of the right that forms the object of the relevant
transaction or agreement (e.g. assignment of future claims) does not constitute such a
condition. Claims falling due on a specified future date, on the other hand, are treated as valid,
present claims in the course of the insolvency proceedings.

b. Security Requiring Registration. Another exception applies to security

interests which require official registration (e.g. mortgages and land charges). Under German
law, security interests requiring registration are deemed to have been validly created for
insolvency purposes once:
 18

• all other conditions of the transaction apart from the registration requirement
have been fulfilled;
• the security agreement has been irrevocably entered into by the security
provider; and
• the creditor has filed for registration of the security with the competent
register.

If all of the above requirements are met prior to the institution of the insolvency proceedings,
the creditor will acquire a valid security interest upon registration even if such registration
occurs after the insolvency proceedings have been commenced (Section 140 (2) IC).
However, the relevant security interest might still be subject to claw-back by the insolvency
administrator.

Frankfurt am Main, May 2012

Contact:

Dr. Dirk H. Bliesener, LL.M. (Yale)

Rechtsanwalt, Attorney-at-Law (New York)
Partner
HENGELER MUELLER
Partnerschaft von Rechtsanwälten
Bockenheimer Landstraße 24
60323 Frankfurt am Main
Germany

Office +49 69 17095559

Mobile +49 1733221515
Facsimile +49 69 170957558
Email dirk.bliesener@hengeler.com
www.hengeler.com