Insolvency Challenge: Recovery of Payments
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INTRODUCTION
The insolvency administrator is demanding the return of payments already received. The basis for this is the right to challenge transactions under §§ 129–146 of the German Insolvency Code (InsO). For companies, this is not a matter of morality, but of hard cash: Can the claim be defended against, reduced, or resolved in a financially sound manner? This article categorizes the relevant grounds for avoidance, explains their requirements in an accessible manner, and shows how a company affected by an avoidance action can effectively defend itself.
LEGAL BASIS
The challenge is based on Sections 129 through 146 of the Insolvency Code (InsO). A legal act that disadvantages other creditors is subject to challenge. A legal act is any intentional arrangement with legal effects, such as a payment or the creation of security. Disadvantage occurs when the estate is reduced or creditors’ access to it is impeded. The insolvency administrator must substantiate and prove the facts of the case and the existence of the disadvantage. The affected company bears the burden of presenting and proving exculpatory facts.
CRIMINAL OFFENSES — EXPLAINED IN SIMPLE TERMS
§ 130 InsO (Congruent Coverage)
- What this is about: Settling a claim that is due and owed in the agreed-upon manner.
- Why the trustee is bringing the action: alleged knowledge of insolvency.
- What matters: standard payment terms, unchanged bank account information, no escalation. Routine reduces the likelihood of disputes.
Section 131 of the Insolvency Code (Inconsistent Coverage)
- What this is about: Performance for which there was no legal entitlement (e.g., premature payment without legal basis, unusual security, performance under pressure from enforcement proceedings).
- Why the Administrator Gets Through More Easily: Atypical Behavior as a Warning Sign.
- Defense: Argue that the atypical nature of the arrangement is standard practice in the industry or contractually agreed upon; demonstrate equivalence and causation.
Section 132 of the Insolvency Code (legal act that directly disadvantages creditors)
- What this is about: Actions that reduce the balance sheet total without any intermediate steps (e.g., collateral not owed for existing liabilities).
- Defense: Prove that there is no net disadvantage, that value has been compensated, and that consideration has been provided.
Section 134 of the Insolvency Code (service rendered without compensation)
- What this is about: Services provided without adequate compensation.
- Defense: Document that payment was made and that value was provided; demonstrate genuine consideration.
Section 135 of the Insolvency Code (Legal Transactions with Shareholders)
- What this is about: Repayments on shareholder loans and collateral provided to shareholders.
- Relevance for suppliers: only if the supplier is also a shareholder or a related party.
Section 133 of the Insolvency Code (Voiding for Intentional Fraud)
- What this is about: Legal acts committed by the debtor with the intent to disadvantage the creditor; the creditor was aware of this intent.
- Indicators: persistent payment delays, imminent enforcement, and installment-like agreements related to a financial crisis.
- Defense: Normal business relationship, equivalence of performance and consideration, no knowledge of insolvency.
Section 142 of the Insolvency Code (cash transaction)
- What it’s all about: an equitable, timely exchange of services and consideration.
- Meaning: central counterweight; debate over whether they occurred close together in time and whether they are of equal significance—both of which require extensive documentation.
REVIEW PERIODS – OVERVIEW
- § 130 InsO (corresponding): generally, the last three months prior to the filing of the insolvency petition.
- § 131 InsO (incongruent): particularly strict in the last month; in the second and third months, only under additional conditions (including insolvency/knowledge).
- § 133 InsO (Intent): up to ten years; in some cases, limited to four years for security interests and satisfaction of claims.
- § 134 InsO (pro bono): four years.
- § 135 InsO (Shareholders): Repayment of shareholder loans within one year; collateral may be subject to longer periods in some cases.
The exact classification depends on the specific facts of the case and the timing of the action.
BURDEN OF PROOF AND PRESENTATION OF EVIDENCE – WHO MUST PROVE WHAT
The insolvency trustee (as representative of the estate) must fully set forth and prove the grounds for avoidance asserted—including prejudice to creditors, the nature and timing of the legal act, (in)congruence, insolvency during the relevant period, and—to the extent required by the facts of the case—knowledge or constructive knowledge on the part of the party against whom the avoidance action is brought.
The company affected by the avoidance action (the party against whom the action is brought) bears the burden of presentation and proof only for defenses that preclude legal action, in particular cash transactions (Section 142 InsO), specific compensation for value, or the statute of limitations.
Based on the facts of the case—summarized concisely:
- § 130 InsO (congruent): The administrator must provide evidence of coverage, the time period, insolvency, and knowledge or constructive knowledge; the party against whom the challenge is brought must submit evidence of normal business practices and—if applicable—the cash transaction.
- § 131 InsO (incongruent): The administrator establishes the atypical nature of the transaction and the time period (strictly in Month 1; Months 2–3 subject to additional requirements); the party against whom the avoidance action is brought demonstrates a contractual or industry-standard basis and equivalence.
- § 132 InsO (directly prejudicial): The trustee must prove the direct prejudice; the party against whom the challenge is brought must demonstrate economic compensation.
- § 134 InsO (without consideration): The administrator claims that the transaction was without consideration; the party against whom the challenge is brought provides evidence of consideration and consideration in return.
- § 135 InsO (Shareholder): The administrator establishes the facts constituting shareholder conduct; the party against whom the action is brought delineates the roles and any third-party funds.
- § 133 InsO (Intent): The trustee bears the burden of proving the debtor’s intent to disadvantage creditors and the opposing party’s knowledge (usually based on circumstantial evidence); the opposing party challenges the chain of circumstantial evidence with routine documentation and evidence of consideration.
- § 142 InsO (Cash Transaction—Defense): The burden of proof rests entirely with the party against whom the challenge is brought; equivalence and close economic proximity in time must be demonstrated.
Assumptions and circumstantial evidence—effect without a reversal of the burden of proof
Circumstantial evidence such as suspension of payments, persistent payment delays, imminent enforcement proceedings, or installment-like agreements makes it easier for the administrator to take action. Such evidence serves as an indication but does not shift the burden of proof on the merits. It is the responsibility of the party against whom the challenge is brought to substantially refute such circumstantial evidence—through documented routine practices, project- or acceptance-based payment terms, clear consideration, stable credit and credit limit data, and traceable sources of third-party funding.
Secondary Burden of Proof
Facts pertaining to the opposing party in the challenge (e.g., equivalence in cash transactions, internal acceptance processes, payment methods via factoring, escrow, or group clearing) trigger a secondary burden of proof on the part of the company: a structured presentation of the facts, supported by documentation, is required. Nevertheless, the substantive burden of proof for the grounds for avoidance remains with the insolvency administrator.
Typical document layouts
- Factors pointing in favor of the administrator include: failed direct debits, changes in bank accounts, imminent enforcement proceedings, collateral provided retroactively for existing liabilities, and emails indicating liquidity problems.
- Arguments in favor of the defense include: a closed timeline (order – service/acceptance – invoice – payment), unchanged payment terms/accounts, documented consideration, contractually fixed – performance-based – installments, and traceable third-party cash flows.
DEFENSIVE STRATEGIES
§ 130 InsO (congruent)
- Approach: Demonstrate that this is a standard contractual practice; refute allegations of lack of knowledge.
- Required documents: Purchase order/framework agreement with payment terms; acceptance certificates/proof of performance; invoice; payment notice and value date; unchanged bank account information; open-item lists; credit insurance/credit limit information, if applicable.
- Key arguments: due and payable claim; agreed-upon payment method; no imminent enforcement; no extraordinary payment extensions; no knowledge of—or reason to have known about—insolvency.
Section 131 of the Insolvency Code (incongruent)
- Approach: Explain the atypical nature of the contract in terms of standard industry practice; emphasize economic neutrality.
- Required documents: contractual provisions regarding advance/staggered payments and security; process descriptions; performance/acceptance reports; proof of value.
- Key arguments: performance- or acceptance-related deviation; equivalence; no disadvantage in the process.
Section 132 of the Insolvency Code (directly prejudicial)
- Approach: Demonstrate that the exchange of value and consideration occurred within the same economic context.
- Required documents: Valuation documents; credit notes/settlements; service receipts; settlement agreements.
- Key arguments: no net outflow from the estate; economic neutrality.
Section 134 of the Insolvency Code (pro bono)
- Approach: Break down the concept of remuneration into its constituent parts.
- Required documents: Performance/acceptance reports; service reports; proof of use; offsetting invoices
- Key arguments: concrete, measurable consideration; not a favor.
Section 135 of the Insolvency Code (Shareholders)
- Approach: Clarify roles and disclose third-party funding.
- Required documents: List of shareholders/capital structure; loan and security agreements; cash flows; third-party creditor positions.
- Key arguments: no shareholder loans or external third-party funding; otherwise, a financially viable solution through a sound settlement agreement.
Section 133 of the Insolvency Code (Intent)
- Approach: Break down the chain of evidence; document the business process in a systematic manner.
- Required documents: Chronological record of order–service–acceptance–invoice–payment; schedule/project emails; credit limit/creditworthiness documents; evidence of consideration; third-party funding sources, if applicable.
- Key arguments: no knowledge of the crisis; payment terms based on project/acceptance rather than a liquidity crunch; equivalence.
Section 142 of the Insolvency Code (Cash Transaction – Objection)
- Approach: Provide complete evidence of equivalence and close economic proximity in time.
- Required documents: Order; delivery slip/proof of service; acceptance; invoice; payment notice; value date; price/valuation report, if applicable.
- Key arguments: direct exchange; economic equivalence; barrier to challenges.
DOCUMENTED CHRONOLOGY OF THE TRANSACTION—PURPOSE AND IMPLEMENTATION
The chronology of the transaction serves as the evidentiary framework for the company in question. It is intended to provide verifiable proof that each payment was based on a specific, equivalent service and that the transaction proceeded in accordance with the contract. As such, it supports the company’s defense (routine, cash transaction, value exchange, lack of knowledge).
What the chronology shows:
- Contractual Basis: Purchase Order/Framework Agreement, Payment Terms, and, if applicable, Acceptance Procedures and Security Interests.
- Consideration: Delivery/service and acceptance, including the date and reference to the order.
- Payment Allocation: Invoice and value date are uniquely assigned to the same service.
- Payment method: Payment via the agreed-upon method/account; no alternative methods.
- Temporality/Equivalence (if asserted): a close economic connection and equivalence in value.
- Value Adjustment/Third-Party Funding (if applicable): Credits/offsets or factoring/escrow/group clearing are presented in a transparent manner.
Here’s how the chronology is structured:
- Order of documents: Purchase order/framework agreement → Proof of service/acceptance → Invoice → Bank statement/value date (payment advice, if applicable) → Credit memo/offset, if applicable → Third-party funding documents, if applicable.
- A brief note for each document: “Refers to order X/item Y; pertains to invoice Z; value date on ….”
- Briefly explain and document any discrepancies (e.g., partial acceptances or payments due to acceptance windows).
SAMPLE LETTERS FOR INITIAL CONTACT WITH THE INSOLVENCY ADMINISTRATOR
Example 1: First Factual Response
Subject: Your letter dated [date] – Challenge under the Insolvency Code (InsO) – Case [Case Number]
Dear Sir or Madam,
We dispute both the merits and the amount of the claimed demand for restitution. The disputed payment is part of an ongoing exchange of services. Due claims were settled in accordance with the contract. We had no indication that the other party was insolvent.
Please submit the payment summary you have provided, including the value dates, as well as any documents you consider relevant. Once we receive them, we will provide additional comments.
Sincerely,
[Company, Contact Person, Contact Information]
Template 2: Request for Documentation and Deadline Management
Subject: Your letter dated [date] – Challenge under the Insolvency Code (InsO) – Case [file number] – Request for Documents / Deadline
Dear Sir or Madam,
To conduct a proper review, we require the following documents and information:
– a payment schedule with posting and value dates, as well as a breakdown by invoices/services,
– the evidence you have cited regarding the alleged insolvency during the relevant period,
– Information regarding any enforcement measures, installment agreements, or security arrangements on which you are relying.Please send the documents as soon as possible. We ask that you extend the deadline you have set until further notice. A final decision will be made after the documents have been reviewed.
Sincerely,
[Company, Contact Person, Contact Information]
THREE EXAMPLE CASE STUDIES
Timely Payments Throughout the Project
A company delivers specialty parts according to milestones. The invoice is due upon acceptance and is paid within the agreed-upon timeframe. There was no cycle of payment reminders, no enforcement proceedings, and no change of bank accounts. The administrator argues that there was alleged knowledge of insolvency. The chronology shows a routine process: order, acceptance, invoice, payment.
Result:
The attack fails or results in a very low success rate.
Installment Agreement for Performance-Related Reasons
This is a major project; a large single payment is settled in several installments because acceptance inspections take place only during defined production windows. This is documented in the contract. There are no emails complaining about cash flow issues, only agreements regarding deadlines and acceptance inspections. The administrator is trying to fabricate a crisis situation. The documents show the opposite.
Result:
Reasonable agreement or defense, depending on the evidence.
Cash Payment for Spare Parts Delivery
Express delivery of critical replacement parts. Payment shortly after delivery. Complete acceptance and service records; payment notices and value dates are documented. Equivalence and tight time constraints are clear.
Result:
Challenge Fails Due to the Cash Transaction.
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The contractual relationship between media agencies and advertisers has long been the subject of controversy. The main issue at stake is whether media agencies constitute a separate economic tier or should be classified as agents acting on behalf of advertisers. The most prominent case that led to this debate involves Alexander Ruzicka, who was sentenced to a long prison term because he allegedly pocketed discounts and other benefits received from media outlets at the expense of the media agency (and thus ultimately at the expense of the advertisers), of which he was then the managing director, into his own pocket at the expense of the media agency. This high-profile trial, at the very least, has brought the practices of media agencies as a whole—particularly the scope and handling of benefits (“kickbacks,” free spots, etc.) granted by the media—to the forefront of public discussion. Against the backdrop of the “system’s” striking lack of transparency, discussions are focused in particular on the nature and scope of the discounts granted, as well as—not least—on the question of who is entitled to these discounts.
The following section provides an overview of how contractual relationships in the media industry are to be assessed under civil law.
Preliminary Considerations on the Activities of Media Agencies
The primary purpose of the contractual relationship between the media agency and the media outlets is the placement of advertising for advertisers. Consequently—at least in practice—media agencies act as “intermediaries” for advertising between advertisers and media outlets. In light of the foregoing, it seems conceivable that the contractual relationship between the advertiser and the media agency influences the contractual relationship between the media agency and the media. It therefore makes sense in this case to first examine the contractual relationship between the media agencies and the advertisers:
Contractual Relationship Between an Advertiser and a Media Agency
Current View: Agency Agreement as Defined in § 675 of the German Civil Code (BGB) versus “Independent Business Entity” (Independent Trader)
Agency Agreement as defined in § 675 of the German Civil Code (BGB)
In light of the nature of the contractual relationship—namely, media buying and media execution, media planning, media consulting, and media analysis—it is traditionally classified under the law governing agency services (§ 675 BGB): The advertising client does not advertise on its own, but rather has advertising conducted on its behalf. This activity corresponds to the (still) prevailing interpretation of the term “agency” as defined in § 675 BGB, according to which the agent is obligated to the principal to perform an independent activity of an economic nature for the purpose of safeguarding the principal’s financial interests (see BGH decision of June 16, 2016, Case No. III ZR 282/14, NJW-RR 2016, 1391; Munich Commentary on the BGB, 5th edition, § 675, para. 3 et seq., with further references).
To this day, the activities of media agencies correspond to the aforementioned definition; these activities are carried out by media agencies—as defined above—independently, in accordance with prevailing opinion — namely, in the absence of a contrary agreement , in their own name and on their own account— and , in any case , also in the best financial interests of their advertising clients (see Martinek, Media Agencies and Media Discounts, 2008, p. 27; ibid., January 2015, 6, 9 et seq., 13 et seq.). This classification is also confirmed in the expert opinion of retired Federal Court of Justice (BGH) Judge Dr. Gerhard Schäfer dated January 31, 2009.
Depending on their specific terms, these agency agreements fall under the law governing service contracts (§ 611 BGB) or contracts for work and labor (§ 631 BGB). A contract for work is likely to exist if the contract covers a single, results-oriented measure; a service contract is likely to be involved if the contract is defined purely in terms of time and/or specific subject matter.
“Separate economic sector”
The prevailing opinion described above is countered by the view held by the media agencies themselves—and supported by significant voices in the literature (in particular, Prof. Michael Martinek, op. cit.)—according to which the provisions of the law of agency, and thus also the law of agency, have led to a “divergence” from the model of the agent, given the practices of the media agency business that have developed over decades, with the result that the law of agency should remain inapplicable. This view is based primarily on the argument that media agencies now constitute a “separate economic sector,” and therefore classifying them as “intermediaries” is no longer appropriate.
This view is based primarily on the following aspects of media business practices:
- Acting in Their Own Name and on Their Own Account: Business Risk Unless otherwise agreed upon in an individual contract, media agencies act in their own name and on their own account. This means that they also bear the business risk associated with placing advertisements in the media, such as payment of the placement costs even in the event of the client’s insolvency or refusal to pay. They are liable to their client for errors on the part of the media outlet, such as late or incorrect publication of the advertisement.
- Compensation System: Reliance on Non-Collective-Bargaining-Agreement Discounts In practice, advertisers require media agencies to release or pass on the media commission (agency compensation, AE commission) received from media outlets. In practice, this usually takes place via a settlement process: The advertiser agrees with the media agency on a fee equal to a specific percentage of the media placement volume; in reality, this percentage ranges between 0.8% and 2.0%. The advertiser uses part of the remaining 15% AE commission to pay the creative agency (approximately 7%) and retains the rest for themselves.
As a result, media agencies retain only a small fraction of the agency fees granted to them by the media. Consequently, in order to achieve their business objectives for their companies, they feel compelled to generate additional income from the media— in the form of non-standard discounts, bonuses, or payments —for additional services or for pooling the budgets of multiple clients.
Based on the aforementioned circumstances, which can hardly be disputed in fact, it is increasingly being concluded that, in any case, this does not constitute typical agency activity within the meaning of § 675 of the German Civil Code (BGB). Thus, the media agencies’ own brokerage activities tend to take a back seat in their business today.
Appreciation
If an employment contract or a contract for work and services concerns “agency on behalf of another,” the agent is obligated to surrender to the principal everything he has obtained through the agency (§ 675(1) in conjunction with § 667 BGB). This is where the relevance of the dispute lies:
The view that media agencies, as a separate economic sector, no longer conduct business management in accordance with the principles of the German Civil Code (BGB) deserves consideration. For the most part, media agencies operate their own business at their own economic level. The operation of this independent business can indeed be described as a necessity resulting from the fact that advertisers regularly and successfully insist on passing on the discounts stipulated in collective bargaining agreements. Against this backdrop, media agencies can generate their own revenue only in other ways, such as by negotiating client-independent discounts to which they alone are entitled.
Nevertheless, according to the recent ruling of the Federal Court of Justice (BGH) dated June 16, 2016 (Case No. III ZR 282/14, NJW-RR 2016, 1391), in cases of doubt, an obligation to forward payments must be assumed because, in its view, the media agency is a “typical agent.” The BGH’s headnotes read as follows (NJW-RR 2016, 1391, beck-online):
1. By their legal nature, media agency contracts are generally classified as agency agreements, in which one party (the media agency) undertakes to perform an independent economic activity to safeguard the financial interests of another party (in particular, media planning and buying), and the other party (the advertising client) undertakes to pay a fee.
2. If the media agency acts in its own name but on behalf of the client when placing media orders, it initially receives all discounts and other benefits as the media’s contractual partner; however, due to its status However, as a typical agent, she is subject to the obligations to provide information and to surrender property under §§ 666, Section 667, Alternative 2 of the German Civil Code (BGB) .
3. The fact that a special benefit is provided not directly to the contractor but to a third party does not preclude the contractor from being obligated to surrender it. The decisive factor is whether an overall assessment of the circumstances of the individual case shows that the agent is to be regarded as the economic owner of the asset (following BGH, NJW 1987, 1380).
It follows from Guiding Principle 3 that the obligation to surrender must be assessed based on the circumstances of the individual case. In line with this, the Munich Higher Regional Court, in its judgment of December 23, 2009 (Case No. 7 U 3044/09), expressly held that the obligation to pass on (or the obligation to surrender) discounts and benefits may be governed by individual contractual provisions. The parties should do so in order to avoid the dispute described above.
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