Avoidance claims under the Insolvency Act are assignable!

Avoidance claims under the Insolvency Act are assignable!

In a highly anticipated decision, the Supreme Court (in case 17 Ob 6719k) examined for the first time the admissibility of an assignment of insolvency avoidance claims – and it ruled that avoidance claims can be assigned! In making this landmark ruling, which paves the way forward but is no less surprising, the Supreme Court has provided clarity where there previously was none.

Condensed exposition of the facts

In the specific case, C-GmbH (debtor), whose assets were first subject to restructuring proceedings without self-administration, which were later transformed into bankruptcy proceedings, had already concluded a purchase agreement for three properties with current defendant Ms. R (opponent in the avoidance proceedings) before the restructuring proceedings were initiated. With the consent of the creditors' committee, the insolvency administrator agreed to a contract on assignment against payment, according to which all known and unknown claims of the debtor against the defendant were assigned to G-GmbH. G-GmbH (plaintiff) did not file an insolvency claim in the insolvency proceedings of the debtor. The plaintiff then requested the payment of EUR 471,745.27 (including the purchase price of the properties) or alternatively the cancellation of the purchase contract alleging it was invalid. It based its claim on Section 28 no. 3 in conjunction with Section 32 of the Insolvency Act.

Fundamental legal question

The concrete legal question which the Supreme Court had to deal with in this decision concerns the admissibility of an assignment of insolvency avoidance claims. The plaintiff asserted an assigned claim for avoidance, whereas the defendant objected that it is not admissible for insolvency avoidance claims to be assigned, arguing therefore that the plaintiff did not have the right to bring a legal action.

Practical relevance

The practical relevance of this question can be easily demonstrated: The possibility to realize avoidance claims can considerably accelerate the insolvency proceedings, which results in cost savings for the insolvency estate. In addition, in order to protect the assets or in the case of a lack of assets, it is often not possible for the insolvency administrator to conduct expensive avoidance proceedings, which is why the assignment of the avoidance claim is more advantageous from an economic perspective. Furthermore, it is not the insolvent estate but a third party – the assignee – who bears the risk of litigation and, in the event the court finds in its favour, also the risk of recoverability.

Outcome of the proceedings

Most experts cited the insolvency administrator's monopoly on avoidance as an argument against permitting assignment, since this is supposed to be a highly personal right. According to clause 2 of Section 1393 of the Civil Code, this maximum personality precludes lawful assignment.

The Supreme Court now sees this differently and argues that the right of avoidance must be exercised by the insolvency administrator in the interest of all creditors, but no maximum personality and no prohibition of assignment can be derived from this. Furthermore, the insolvency administrator is free to dispose of the right of avoidance, in particular also by waiver and settlement. Especially in the case of a lack of assets in the insolvency estate, the interests of all creditors are protected by the contract on assignment, as at least a certain amount flows into the assets of the estate.

Future development?

It remains to be seen to what extent the admissibility of the assignment of insolvency avoidance claims will change the working practice of insolvency administrators. Insolvency administrators can now – with certainty about the applicable legal situation – assign insolvency avoidance claims and in this way gain assets for the insolvency estate. Especially in cases where there is a lack of assets in the insolvency estate, this possibility will probably be of considerable importance. Whether a genuine "market" for such assignments will develop is rather doubtful, as the assignment of insolvency avoidance claims will probably remain the exception.

Thomas Trettnak / Marcus Lusar