When a company goes bankrupt, one of the bankruptcy administrator's most central tasks is to investigate whether certain creditors have been favored at the expense of others in the period before bankruptcy. Avoidance of extraordinary payments under the Satisfaction of Claims Act § 5-5 is an important tool to ensure equal treatment of creditors.
What can be avoided?
The Satisfaction of Claims Act § 5-5 first paragraph provides grounds for avoiding payment of debt that the debtor has made later than three months before the cut-off date, if the payment was made:
With unusual means of payment
Before normal payment time
With amounts that have significantly impaired the debtor's ability to pay
Common to all alternatives is that the payment cannot be avoided if it appeared to be ordinary.
Unusual means of payment
A payment is considered made with unusual means of payment if the agreed means of payment has not been used. If the debtor pays with goods instead of money, this will normally be an unusual means of payment.
In the Supreme Court's judgment Rt. 2008 p. 1170 (the Rema 1000 judgment), the takeover of inventory and operating equipment as settlement for debt was considered payment with unusual means of payment, even though this was agreed as a subsidiary means of payment in the franchise contract.
Payment before normal payment time
This alternative includes not only payment before due date, but also payment before "the time when the debt must be assumed to have been paid if the debtor had not become insolvent," cf. the preparatory works. This includes cases where a loan is terminated by the bank according to a default clause due to breach.
According to the ordinary reservation, payment a few days before the due date will usually be ordinary, especially if the payment is not related to the payment difficulties.
Amounts that have significantly impaired the ability to pay
The third alternative targets payment with amounts that significantly impair the debtor's ability to pay. The relative size of the amount is decisive, not the absolute size.
When assessing whether the payment has significantly impaired the ability to pay, one must look at the debtor's liquidity – their ability to pay their obligations as they fall due. In legal theory, it has been suggested that an amount constituting 10-25% of the debtor's liquid assets would be considered significant.
The ordinary reservation
Even if a payment fulfills one of the three alternative conditions, it cannot be avoided if it appeared to be ordinary. What is ordinary depends on an overall assessment. The preparatory works mention that "ordinary is payment in the usual routine of current expenses in connection with the operation of the debtor's business: payment for delivered raw materials, rent, wages, taxes, etc."
For payments that have significantly impaired the debtor's ability to pay, the ordinary reservation will be particularly important for payments that are necessary for continued operation. The debtor's more specific payment habits may also be relevant in the assessment, cf. Rt. 1995 p. 222 (Direkte Reklame).
The avoidance rules are central to ensuring equal treatment of creditors in bankruptcy, and bankruptcy administrators should therefore carefully evaluate all payments made in the period before bankruptcy.
