Third-party discharging payments in insolvency proceedings

Facts

In mid-June 2016, the insolvency court appointed the claimant as provisional insolvency administrator over the assets of debtor A, a self-employed tradesman. The claimant received extensive powers, including giving consent to all the debtor’s transfers and permission to collect the debtor’s receivables in a fiduciary account. He was also to continue running the debtor’s business until a decision had been made on the insolvency proceedings, in order to prevent loss of assets. 

The debtor had a current account at the B Bank, into which a payment of € 446.25 was made on June 22, 2016 and several payments on June 28, 2016 (€ 357, € 4,373.25 and € 238), by the C GmbH, a third-party debtor. These payments were for invoices that the insolvency debtor had issued for services supplied. On 28 June, the insolvency debtor withdrew €1,000 in cash and transferred wages to an employee.

On the same day, the claimant informed the B bank and the C GmbH by telefax that he had been appointed as insolvency administrator and indicated that payments may now only be made to him. The claimant also gave permission to withdraw € 1,900 for the debtor’s living costs, but without being aware of the withdrawal of the € 1,000.

In July 2016, insolvency proceedings were started. The claimant collected the remaining balance of the bank account for the insolvency assets, except for €900, which was intended for the debtor’s living costs. In 2016 the tax office issued VAT notices which treated certain of the insolvency debtor’s credits as debts of the insolvency assets. 

In the subsequent court case, the parties contested the effect of the payment made by the C- GmbH and the establishment of debts of the insolvency assets according to sec. 55 para. 4 Insolvency Code.

The Federal Fiscal Court’s decision

The Federal Fiscal Court decided that no debts of the insolvency assets according to sec. 55 para. 4 Insolvency Code are established if a third-party debtor pays into an account of the later insolvency debtor in the opening proceedings, paying off the debt, under sec. 24 para 1 in conjunction with Section 82 Insolvency Code since the third party debtor receives the compensation for his provided services which are subject to VAT

According to sec. 55 para. 4 Insolvency Code, after insolvency proceedings have been opened, debtors’ liabilities from the tax debtor-creditor relationship that have been established by a provisional insolvency administrator or by the insolvency debtor with the provisional insolvency administrator’s permission count as debts of the insolvency assets (para. 19).

If, as here, the provisional insolvency administrator is not able to collect the receivables due to assigned rights to him by the insolvency court, debts of the insolvency assets are only established if they are collected under another legal entitlement of the insolvency administrator. This is not given if the payment causes the debtor’s receivable to expire, not because the provisional insolvency administrator’s approval but based on other insolvency regulations, without the provisional insolvency administrator acting (para. 23). 

Section 82 Insolvency Code is such an insolvency regulation, which results in the third-party debtor being discharged of his debt if he has made payment to fulfil his liability after the insolvency proceedings have been opened, although the liability was to be fulfilled to the assets involved in the insolvency proceedings, and he was not aware at the time that proceedings had been opened. The effect of sec. 82 Insolvency Code should also be taken into account for VAT. The recipient of the service (here, the third-party debtor) should pay the amount to release itself from his civil law duty to provide services. The performing party (here, the insolvency debtor) should receive the payment for his provided service, since due to the discharging effect of the payment, a second payment by the third-party debtor into the insolvency asset for this service can no longer be demanded (para. 25). 

Therefore, the payment for the service supplied by the insolvency debtor to the third-party debtor was conclusively received for the purposes of VAT by the insolvency debtor, since the provisional insolvency administrator’s consent to a payment that is already effective under Section 82 Insolvency Code, cannot have any legal effect. 

Hence, the C GmbH’s payment already had a discharging effect under Sec.82 Insolvency Code and no debts of the insolvency assets according to sec. 55 para. 4 Insolvency Code could be established. 

Conclusion

In this judgment, the Federal Fiscal Court answered a very practical question. It remains to be seen how the Federal Fiscal Court will decide in the other pending cases, XI R 3/23 (previous court: Düsseldorf Federal Fiscal Court, judgment of 25/1/2022 – 5 K 1749/21) on the requirement for a second correction under sec. 17 para. 2 no. 1 sentence 2 of the German VAT Act without a previous first correction and XI R 23/22 (previous court: Düsseldorf Fiscal Court, judgment of 13/7/2022 – 4 K 1280/21 AO) on VAT debts as debts of the insolvency assets after insolvency proceedings have been terminated or discontinued. 

Owing to the rising number of insolvencies in recent years, insolvency tax law is becoming more important. There is a particular focus on any remaining VAT tax burden, which can be crucial to whether a business can be restructured successfully. You can find a two-part summary of the practical VAT challenges in insolvency in the German magazine Bilanzierung, Rechnungswesen und Controlling 2024, p. 270 and p. 319