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Insolvency – Contesting the sale of a property below value

In the run-up to a looming insolvency, debtors frequently attempt to salvage the available private assets from the clutches of the insolvency administrator, e.g., by transferring assets to spouses or close relatives. If this happens within a period of four years prior to filing for insolvency proceedings by way of gifting then, according to Section 134 of the Insolvency Code (Insolvenzordnung, InsO), the transfer may be contested. The extent to which this is also possible where assets have supposedly been sold too cheaply was an issue on which the Federal Court of Justice (Bundesgerichtshof, BGH) recently had to provide a ruling.

Issue – Sale price below value

In the case that was decided by the BGH, a father who subsequently became an insolvent debtor had sold a single-family home to his (student) son. A purchase price of € 395k had been agreed. This amount was the “roughly estimated market value” that had been ascertained by an expert consultant shortly before the sale. The purchase price was secured by assuming bank debts (€ 214k) and creating a lifelong residential right in rem for the benefit of the father (€ 181k).

The insolvency administrator was however of the opinion that the property was worth at least € 600k and, therefore, officially announced that he would contest its transfer. 

Basic principle – The burden of proof lies with the insolvency administrator

First of all, the court confirmed the basic principle that contesting is not an option if both parties are satisfied, in good faith, of the equivalence of their gains even if this subsequently turns out to have been false. Therefore, an insolvency administrator carries the burden of presentation and of proof not only for the imbalance in respect of the gains, but the administrator also has to prove that there had been no objective circumstances that allowed the assumption of equivalence.

Please note: In this respect, the first two courts made reference to the expert consultant’s report and, thus, dismissed the contestation of the gift.

Easing of the burden of proof where there are indications of disguising as a gift

For the BGH however this was too short-sighted and in its ruling, from 22.10.2020 (case reference: IX ZR 208/18), it referred the case back to the appeal court for a renegotiation and a decision. In the opinion of the BGH, circumstances had indeed been brought forward that contradicted the notion that the parties had assumed that there was parity in terms of value. The lower courts did not sufficiently appreciate this.

  • The transaction was one between two close relatives; moreover, the buyer (son), as a student, had no income of his own.
  • Shortly before the transfer, tax investigators had searched the father’s premises and had taken business records.
  • The expert consultant had only surveyed the property one day prior to the notarisation of the transfer; when the property was being transferred the expert’s report was not even available in written form and, furthermore, the value that had been determined was described as “roughly estimated”.
  • Finally, there was no detailed valuation of the agreed residential right but, instead, an all-inclusive amount was applied.

Recommendation: To avoid giving the impression of a disguised gift and in order to structure an asset transfer so that it will be as non-voidable as possible, in the run up to the transaction, a proper expert opinion on the fair market value should be obtained from a publicly appointed expert consultant.

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