German court rejects the ‘bow wave theory’ (‘Bugwellentheorie’) in test for company illiquidity

German court rejects the ‘bow wave theory’ (‘Bugwellentheorie’) in test for company illiquidity

Andreas Lehmann of Squire Patton Boggs LLP looks at a recent German case which clarifies the German illiquidity or cashflow test and the so-called bow-wave theory.

What is the German test for insolvency?

Under German law, there are strict legal obligations for the managing directors of an insolvent company to file for insolvency. Failure to comply exposes a managing director to civil and criminal liability. It is therefore important for managing directors to know how to test whether their company is insolvent. One of the legal reasons for insolvency is illiquidity and the second senate of the German Federal Civil Court (BGH) has, in a decision dated 19 December 2017 (II ZR 88/16), clarified a question regarding the illiquidity test.

Pursuant to Section 17 para. (1) of the German Insolvency Code, a company is illiquid if it is not able to pay its liabilities when due. In 2005, the ninth senate of the Federal Civil Court decided (BGH IX ZR 123/04) that a liquidity gap which is not significant and only temporary does not constitute illiquidity but is only a payment delay (Zahlungsstockung) which does not trigger insolvency. The BGH set the threshold for ‘significance’ at 10% of the total obligations due and limited the timeline to cure a liquidity gap to no more than three weeks. According to the BGH, if a liquidity gap can be reduced within a three week period to less than 10% of all due payments, it is generally assumed that the company is not illiquid but only has a payment delay—unless it is foreseeable that the liquidity gap will in the near future increase above 10%. Where the liquidity gap is at least

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.