• Professional News
  • 03 October 2014

Avoidance under German bankruptcy law

German bankruptcy rules may affect avoidance proceedings in Denmark. That is the implication of a judgment by the Danish Supreme Court in bankruptcy proceedings between a German and a Danish party.

On 15 September 2014, the Supreme Court delivered a judgment in a case between the investment company A Kapitaldienst GmbH and a Danish investor. The case concerned the question of whether the rules of the Danish or the German bankruptcy act were applicable.

The Supreme Court judgment establishes that German bankruptcy rules may affect avoidance proceedings in Denmark.

The case in brief
The bankruptcy estate of A Kapitaldienst GmbH commenced proceedings against a number of creditors, claiming payment of an amount which was voidable in the opinion of the bankruptcy estate.

The investment company had been carrying on business under its own name, but on the basis of investments made by investors, including the Danish investor.

The German financial authorities filed a bankruptcy petition against the company as they had found that the company had no significant values. The company was in fact using the investments made by new investors to pay fictitious dividends to old investors.

The Danish investor received such a fictitious dividend on 28 March 2002. The reference date of the bankruptcy estate was 11 March 2005.  

German vs. Danish bankruptcy law
The German bankruptcy act makes it possible for the trustee to demand that transactions made before the bankruptcy be avoided if they change the relative position of or defeat or delay creditors.

Under German law, the payment of fictitious dividends is deemed to be a gratuitous transaction, which may therefore be avoided if made up to four years before the reference date.

Under s. 64 of the Danish Bankruptcy Act, gifts, which must also be described as gratuitous transactions, can be avoided if made up to maximum two years before the reference date, however, typically only up to six months before the reference date.

It was therefore crucial to the bankruptcy estate that the German bankruptcy rules were applied.

The judgment of the Supreme Court
It is a general assumption that a number of bankruptcy law issues should be decided according to the law of the country in which the bankruptcy arises. By its judgment, the Supreme Court confirms this assumption. The fact that a choice of law agreement had been made between the parties, which made no reference to German law, did not lead to a different result.

The consideration that all the creditors should be treated according to the same rules was therefore decisive.

An exception from this general rule can be made only if a foreign rule of law is clearly incompatible with Danish law. With its judgment, the Supreme Court has established that a four-year preference period is not manifestly contrary to the Danish legal order.

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