• Will A Direct Debit Soon Be Insolvency-Proof?
  • May 13, 2011 | Author: Michael Grünwald
  • Law Firm: Sibeth - Munich Office
  • I. Introduction

    In direct debit transactions, up to now a distinction has been made between direct debit orders issued to the bank (Abbuchungsauftrag) and direct debit authorisations issued to the payee (Einzugsermächtigung).

    1. Direct debit orders issued to the bank (Abbuchungsauftragsverfahren)

    In a direct debit order to the bank, the payer issues a direct debit order to the bank instructing the bank to pay a direct debit on his behalf and against his bank account, with the effect of discharging his payment obligation to the payee. In the relationship between the payer and the paying bank, the direct debit is finalised if the debit is not cancelled at the latest on the second banking day after it has been posted.

    2. Direct debit authorisations issued to the payee (Einzugsermächtigungsverfahren)

    In the direct debit authorisation procedure, the payer authorises the creditor to collect certain payments from his account. The payer does not issue any instruction to his bank. Because of this, the payment obligation is deemed to have been fulfilled not when the direct debit is paid, but when it is approved (the "approval theory"). Usually, this approval is not explicitly granted. In practice, a notional or implied approval is customary. According to No. 2.4. II 3 of the terms and conditions for direct debit authorisations, the approval is deemed to have been given, at the latest, if the payer has not objected to a direct debit collected by a payee to whom he has given a direct debit authorisation within six weeks after receiving the statement of accounts for the relevant current account period. Until the approval has been given by the payer, there is a state of suspense both between the payer and his bank and between the payer and the creditor, because any valid objection by the payer would cause the payment to be reversed by the banks, so that the direct debit would have to be returned to the creditor's bank, which in turn would then debit the amount to the creditor's account. In addition, the creditor's claim to receive payment from the payer would not have been met. This can be unpleasant for the creditor if insolvency proceedings have been initiated against the payer's asset during this period of suspense.

    II. Case law rulings of the Federal Court of Justice (BGH)

    Since 2004 there have been considerable differences of opinion between the IX Senate of the Federal Court of Justice, which is responsible for insolvency law, and the XI Senate, which is responsible for banking law, on the question of whether direct debit payments based on a direct debit authorisation are insolvency-proof.

    On the basis of a ruling by the IX Senate of the Federal Court of Justice of 2004 about an objection to a direct debit in insolvency, insolvency administrators then made extensive use of their right of objection to direct debits processed on the basis of direct debit authorisations. The IX Senate justified this right of objection on the grounds that the insolvency administrator was duty-bound to safeguard the debtor's assets to protect the future insolvency assets. For this reason, it was ruled that the right of objection would exist  - without triggering any compensation obligation for the administrator - even if no factual objections can be made against the claim. The XI Senate of the Federal Court of Justice saw this differently and argued that even an insolvency administrator is not entitled to carry out any action, e.g. by filing an objection, if the same action would lead to an obligation to pay compensation if it were taken by the payer.

    In two rulings by the IX Senate and the XI Senate of the Federal Court of Justice of 20 July 2010, each of which was supported in its justification by the other Senate, the dispute about whether direct debits paid by a direct debit authorisation process are insolvency-proof has now been brought to an end. Basically, both Senates now agree that the "approval theory" applies. The legal consequence is that direct debit bookings made with a direct debit authorisation are not insolvency-proof. This is because an administrator can prevent the approval of the payer and the existence of the notional approval by objecting to the booking. But both Senates recognise three exceptions:

    1. SEPA direct debit

    A new procedure alongside direct debit orders issued to the bank and direct debit authorisations issued to the payee is the SEPA direct debit, an Interbank procedure which defines rules and standards for the fully automated collection of direct debits in euros within the territory of the Single Euro Payments Area (SEPA). In the SEPA direct debit procedure, the payee is authorised to collect direct debits from the payer's account with the payer's bank. In addition, the payer's bank is instructed to honour direct debits received from the specific payee and debit the amounts to the payer's account. But the payer does not issue this instruction directly to his bank. Instead, it is transmitted to the payer's bank electronically by the payee's bank, and it is the basis which authorises the payer's bank to honour a SEPA direct debit.

    2. Expiry of the period for an objection

    Even before the end of the six weeks, an implied approval may apply after the receipt of the statement of accounts, taking into account the specific circumstances in individual cases. This is the case, for example, in business to business transactions where there are regular recurring direct debits arising from permanent contractual agreements if the payer has effectively approved them on an occasion in the past.

    3.   Personal assets

    Finally, in an insolvency of natural persons, the insolvency administrator can no longer globally object to or refuse approval for all direct debits which have not yet been approved. The court stated here that the insolvency administrator has no legal power over the assets which are exempt from attachment ("personal assets"), which remain with the payer. Before filing any object, the insolvency administrator must therefore inspect the debtor's account to ascertain whether direct debits are being paid from the personal assets or from the insolvency assets.

    III. Future development

    The rulings of the Federal Court of Justice of 20 July 2010 now mean that insolvency administrators dealing with the insolvency of both natural persons and businesses can no longer globally object to all direct debits that have not yet been approved. For businesses, the possibility of an implied approval must be checked, and for natural persons the personal assets must be taken into account. This has already significantly weakened the position of insolvency administrators. Whether the direct debit is in fact insolvency-proof is decided by the Central Credit Committee (ZKA), a committee formed by the five major associations of the German banking sector. The Central Credit Committee is currently checking an adaptation of the special terms and conditions for direct debits. In the changes in the special terms and conditions for direct debits which were envisaged by the XI Senate of the Federal Court of Justice, even payments made by direct debit on the basis of a direct debit authorisation issued to the payee were insolvency-proof from the outset.