Disputed Direct Debit Payments - Guidance for Banks
Frankfurt Higher Regional Court, 23 January 2013 (file No 4 U 62 /12) and 6 March 2013 (file No 17 U 7/12); Hamm Higher Regional Court, 11 June 2013 (file No 27 U 4/13)
Recent appeal court case law in Germany gives useful guidance to banks on when an insolvency administrator may successfully dispute a debit made from an insolvent debtor’s account under a direct debit authorisation. Under previous Federal Supreme Court case law, a bank customer is taken to have impliedly approved direct debits of regular payments in similar amounts unless the customer objects to the debits promptly. Recent case law from the Higher Regional Courts has provided more detailed guidance in this area.
Banks have been in a difficult position in Germany regarding disputed direct debit payments. This is when a customer alleges that a direct debit from its account has been wrongly made, as the amount was not owed. It was previously understood that a customer had to make any such objection within six weeks of receiving its bank statement. The bank could then re-credit the customer ’s account and claim the sum back from the creditor’s bank under the terms of an inter -bank agreement. The bank could only recover the amount from the creditor’s bank within six weeks of the payment having been made. If the customer became insolvent, complications arose when an insolvency administrator (IA) was appointed. The IA was able to challenge direct debit payments made from the insolvent customer’s account from a few months before. An IA may object even if the debited amount was due and payable.
Implied approval of regular payments in similar amounts
The German courts have recognised the uncertainty and risk for banks and creditors inherent in this system. Under Supreme Court case law within the last few years, a challenge is often no longer possible if the debits concern regular payments in similar amounts, such as tax, social security, rent, leasing or energy payments. A customer is taken to have impliedly approved such direct debits unless it objects within a reasonable amount of time. An IA is therefore unable to challenge such debits if the customer has already impliedly approved them. The exact timing for the implied approval is, however, uncertain.1 This makes it hard for a debtor’s bank to know whether a debit has been impliedly approved.
This is a difficult situation for a bank as it faces claims and legal action either way. An IA may demand a re-credit. If the bank accedes to this, the creditor and its bank may subsequently claim the amount back if it transpires that the payment was impliedly approved. If a bank wrongly re-credited the debtor’s account, and has obtained repayment from the creditor’s bank, the payments will need to be reversed as shown below. The numbers indicate the order of events; the thick arrows show payment flows:
Recent case law on implied approval
The appeal courts have clarified two points for banks in this situation:
- In June, the Hamm Higher Regional Court stated that a bank may assume that a payment has been impliedly approved only two weeks after sending a statement of account to a customer. This was not clear from Federal Supreme Court case law. One Senate2 had confirmed an appeal decision finding only three banking days to be sufficient, another Senate3 had allowed 14 days. The Hamm court stated that a deadline of only three to four days would not be practical.
- A March decision by the Frankfurt Higher Regional Court confirmed that debits could be impliedly approved even though the amounts of payments (for supply of goods) varied considerably. It was sufficient that the debits were within the range that the debtor had approved before to that particular creditor.
Recovering re-credits when debits have been implicitly approved
In January, the Frankfurt Higher Regional Court explained how, under Supreme Court case law, a debtor’s bank can recover an amount re-credited to a debtor’s account after an IA’s objection. This decision highlights why it is important whether or not the original debit had been impliedly approved, as this will determine from whom the debtor’s bank may re-claim the amount. If the payment was not impliedly approved and the objection was justified, the debtor’s bank may reclaim the amount from the creditor (after the six-week period for re-collection between banks has lapsed). If the original debit had been impliedly approved, and the re-credit after the IA’s objection was erroneous, the debtor’s bank must reclaim the amount from the debtor (or the insolvency estate).
Under Supreme Court case law4 a creditor cannot demand the amount wrongly re-debited directly from the debtor, its bank or the insolvency administrator, instead the creditor may have a claim against its own bank. The Frankfurt Higher Regional Court in its March decision partly allowed such a claim by a creditor against its bank, demonstrating that the issue is relevant for a creditor’s bank as well. It must re-credit the amount to the creditor when the re-debit was unjustified due to the implied approval of the original payment. Although the courts do not mention this, the amount then also has to be repaid between the banks.
These decisions give helpful guidance to banks in situations which commonly occur. Many firms use direct debit authorisations for regular payments. Generally, the idea of timely implied approval to direct debits is in the banks’ interests. They cannot reclaim the amount from the creditor’s bank if an IA objects after the six-week period under the inter-bank agreement has lapsed. This used to happen as the debtor often received the balance of accounts weeks after the debit was made. However, there has been considerable uncertainty for banks in this situation. The appeal court decisions assist when deciding whether a direct debit has been impliedly approved and how to reverse the payment flows.
1. Federal Supreme Court (Bundesgerichtshof, BGH), judgments dated 20/7/2010 (file No XI ZR 236/07); 1/12/2011 (file No IX ZR 58/11), 3/4/2012 (file No XI ZR 39/11) and 28/6/2012 (file No IX ZR 219/10).
2. BGH XI ZR 39/11.
3. BGH IX ZR 58/11; IX ZR 219/10.
4. BGH IX ZR 219/10.