Penalty payments instead of imprisonment are prohibited in the case of creditor disadvantage

– Do insolvent debtors have to go to jail for the benefit of their creditors? –

“If the debtor pays a fine knowing that he is unable to pay, the challenge of intent may prevail if the enforcement authority is informed of the debtor’s unfavourable financial situation.” is the official guiding principle of the Federal Court of Justice (BGH, default judgment of 10.07.2014, ref. IX ZR 280/13). This allows both insolvency administrators and creditors to challenge such payments as disadvantage by the state for up to 10 years.

Creditor disadvantage by the state?

A creditor disadvantage is only ruled out if payments are made from the garnishment-free amount and not, for example, via an account that can be garnished in full. It does not help if the debtor wants to avert the enforcement of a substitute custodial sentence by paying in instalments, for example in order to keep his job.

If unattachable income is deposited in an account without garnishment protection (P account), and if there was no successful application for garnishment protection, for example because of the exempt assets, even this previously unattachable money is now attachable in full. The enforcement authority was aware of the assets and debts situation from the files. Income and expenditure are also documented in it, for example in order to determine the amount of daily sentences for fines per day of alternative custodial sentence in sentencing.

Employees of the judiciary or law enforcement agencies are thus put on the razor’s edge, because the debtor’s favor is punishable, §§ 283 ff. StGB. It would be just as delicate if, for example, in the case of a tax offence or other offences on record, the offender’s assets were found to be involved in money laundering, and bail was nevertheless set for release from pre-trial detention and accepted without further checks?

Illegal voluntary receipt of bail or penalty?

The intention of the payer to disadvantage his creditors could at most be dispensed with if there is a concrete prospect of overcoming the crisis situation in the near future, for example because of the certain prospect of a loan or the realisation of his own monetary claims.

Only if the debtor cites facts for this purpose does the judiciary need to deal with this procedural material comprehensively and without contradiction so that the assessment of evidence is complete and legally possible, including the avoidance of violations of the laws of reasoning and principles of experience. The motive of escaping imprisonment in order thereby to keep one’s job, which one would otherwise lose if one did not remain at liberty, is at the most then considerable if it leads to the creditors being paid securely and in full, e.g. because only in this way can one obtain a secure bank loan.

On the other hand, it is not enough for the creditors to get even less as a result of the prison sentence.

In practical terms, this means that there can be no voluntary payment of criminal bonds or fines when there is a bankruptcy situation on record – although a payment would still be a voluntary one because of the otherwise unavoidable imprisonment. This also applies to private creditors, who must be referred to the instrument of sovereign attachment or other enforcement measures. On the other hand, bail for the purpose of regaining liberty is not enforced, nor are fines which are replaced by substituted custodial sentences after expiry of the time limit. So instead, imprisonment is inevitable.

Installment payments from garnishment-free assets or income?

Of course, a third party could provide the bail as a loan, for example, or take over the penalty payment as a gift – as is customary in certain family clans. The following also applies to instalment payments: Voluntary payments – also to the state as creditor – may only be made from assets and income that are demonstrably exempt from seizure.

For if insolvency were to occur, the door would be opened to criminal liability on the part of employees of the law enforcement agencies – just as the acceptance of assets on record would give rise to suspicions of illegality.

What if both payment and non-payment are punishable?

A payment is forbidden because of creditor disadvantage even then – and also the acceptance of a payment – if one makes oneself equally punishable by the non-payment, for example in the case of unpaid social security contributions. Of course, one does not then escape the penalty for this by not paying in order to avoid criminal prejudice to creditors. Even if non-payment increases the debt even more, as in the case of late payment penalties for social security, this does not justify voluntary payment if the bankruptcy situation already exists and cannot be safely overcome in the near future.

Public and private creditors must already be warned if the debtor is slow in paying his debts or pays them over agreed instalments. Only within contractual exchange relationships can an intent to disadvantage be dispensed with in the case of cash transaction-like, congruent performance concurrently, as in the case of punctual rent payment for the apartment and punctual wage payments.

Outside of contractual relationships, and in the case of only indirect benefits, a so-called cash transaction that is exempt from avoidance is out of the question.

Even the conditional intent of the debtor, i.e. a completely different motive pursued, is sufficient for criminal liability and voidability. A punitive pressure in the event of non-payment (e.g. of social security contributions) as the main motive does not stand in the way of conditional intent in the case of – punishable – prejudice to creditors. This, of course, does not allow the required non-payment. The debtor’s situation is similar to that of a wrong-way driver on the motorway: he is not allowed to continue driving or to turn around any more than he is allowed to stop.

No residual debt discharge with regard to tax evasion and other offences

If liabilities are connected with intentionally committed tortious acts, the creditors may bring these into the insolvency proceedings in order to prevent later discharge of residual debt in this respect. This also includes insolvency offences which have led to a previous conviction or the late payment of social security contributions.

Insolvency delay of up to more than 12 months on average

The hope of recovery dies last – and often ends in a criminal conviction for delaying insolvency. Even if employees are not paid wages but are not dismissed, social security is owed from the so-called phantom wage and must be paid. However, if contributions are paid to the social security collection agency in an insolvency situation – accepting a punishable creditor disadvantage – the insolvency administrator will be able to claim back the employer’s and the employee’s contribution (BGH, judgement of 05.11.2009, ref. IX ZR 233/08). Even if the collection agency was not aware of the insolvency situation, this relates to the last three months prior to the opening of proceedings – the employee can also receive insolvency benefits as compensation for this upon application.

If, on the other hand, the employer also pays the wage tax to the tax office on time due to punctual payment of wages, this is assessed as a cash transaction not subject to avoidance, because the employee is owed the gross wage – the payment to the tax office takes place, as it were, via the employer only as a paying agent, similar to a bank transaction, § 142 InsO (BFH, decision of 11.08.2005, ref. VII B 244/04, also BGH, judgement of 05.11.2009, ref. IX ZR 233/08). Contestability would only be given if the (impending) insolvency were already known to the tax office, for example because the wage tax is paid late, § 133 I InsO.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of

www.network-Karriere.com (issue 12.2015)

and

Published in “Der Koment, Fachzeitung für Schausteller und Marktkaufleute” on 30.04.2015 (Under the headline: BGH: Penalty payments instead of imprisonment are prohibited in the case of creditor disadvantage).

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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