Buying Assets From an Insolvency Administrator

Why buying assets from an insolvency administrator is attractive

Buying assets from an insolvency administrator is one of the most common ways to acquire a German business in distress. In a transferring restructuring (übertragende Sanierung), the administrator sells the business, or selected assets, to a new owner in an asset deal, while the liabilities stay behind in the insolvent company. The purchaser acquires a clean operation without most historic debts, often at an attractive price, and the creditors receive the proceeds through the insolvency estate. For strategic buyers, financial investors and competitors, the insolvency sale offers access to customers, know-how, staff and production capacity that would otherwise not be for sale.

The process differs fundamentally from a conventional M&A transaction. The seller is an independent office holder acting for the creditors, the timeline is driven by the liquidity of the estate, warranties are minimal, and statutory approvals by creditor bodies are required. Employment law continues to apply, but insolvency law changes how far the purchaser is liable for historic claims. This guide explains the process from the bidder's perspective.

Timing: who can sell and when

After the filing, the court usually appoints a preliminary insolvency administrator or, in self-administration, a preliminary custodian. A preliminary administrator with limited powers cannot normally sell the business; the main purpose of the preliminary phase is to stabilise operations, secure the assets and prepare the sale. During this period, which typically lasts until insolvency money for the employees runs out, the administrator or the debtor's restructuring team launches an M&A process, contacts potential buyers and opens a data room.

The purchase agreement is usually signed shortly after the opening of the proceedings, when the administrator has full powers of disposal, although signing in the preliminary phase with closing conditional on opening is also seen. In self-administration, the debtor itself sells under the supervision of the custodian and with the consent of the creditors' committee. Anyone buying assets from an insolvency administrator should expect a compressed timetable of a few weeks from first contact to signing, with limited opportunity for extended due diligence.

The sale process and creditor approvals

Administrators typically run a structured bidding process to show that they achieved the best price for the estate. Non-binding offers are followed by limited due diligence, binding offers with a marked-up purchase agreement and final negotiations with one or two bidders. Price is important, but administrators also weigh deal certainty, the number of jobs preserved, financing proof and the speed of closing.

The sale of the business, an establishment, the inventory as a whole, real property by private sale or a significant shareholding requires the consent of the creditors' committee or, if no committee has been appointed, the creditors' meeting (§ 160 InsO). Before the report meeting, a sale of the business requires the committee's consent if one has been appointed (§ 158 InsO).

A sale to insiders, meaning persons close to the debtor or creditors holding at least one fifth of the secured and unsecured claims, or to an acquirer in which such persons hold at least a fifth of the capital, requires the approval of the creditors' meeting (§ 162 InsO). On application by the debtor or a qualified group of creditors, the court can also require the creditors' meeting to approve a sale if it is credibly shown that a sale to another buyer would be more favourable to the estate (§ 163 InsO).

A breach of these approval requirements does not invalidate the sale (§ 164 InsO), but purchasers usually insist on evidence of the approvals as a condition to closing to avoid later disputes. Our insight on the creditors committee in German insolvency explains the committee's role in more detail.

Warranties and price when buying assets from an insolvency administrator

Purchasers must accept a very different risk allocation. Administrators do not know the business from the inside, cannot rely on management representations and must not burden the estate with long-term liabilities. Purchase agreements therefore usually contain only a warranty that the administrator is authorised to sell and, in some cases, that the assets are not encumbered by third-party rights known to the administrator. Any liability for defects is excluded to the extent permitted by law, the purchase is made "as is", and the administrator's personal liability is excluded.

The purchase price is normally paid in cash at closing, often into an escrow or the administrator's estate account, and allocated between the different asset classes because secured creditors are entitled to the proceeds of their collateral. Earn-outs, vendor loans and deferred payments are rare, because the administrator wants to distribute the estate and close the proceedings. Buyers can partly compensate for the lack of warranties through a lower price, intensive but focused due diligence on key assets and, in some cases, warranty and indemnity insurance, although insurers are often reluctant to cover insolvency sales.

Secured creditors, retention of title and contracts

The administrator can only sell what belongs to the estate. Assets delivered under retention of title remain the property of the supplier, who has a right to segregation (Aussonderung), so the purchaser needs either the supplier's consent or a payment arrangement.

Assets transferred to banks as security belong to the estate but are encumbered with rights to separate satisfaction (Absonderung). The administrator may realise movable assets in its possession and collect assigned receivables (§ 166 InsO), deducting flat-rate fees for the estate of four per cent for determining the rights and, in principle, five per cent for realisation (§ 171 InsO). In practice, secured creditors usually agree the allocation of the purchase price and provide release letters for closing.

Contracts do not transfer automatically in an asset deal. Customer and supplier contracts, leases and licences require the counterparty's consent to a transfer of contract, unless the contract allows assignment.

Under § 103 InsO, the administrator can choose whether to perform mutual contracts that were not fully performed at opening, which gives the administrator leverage, but this right is personal to the estate and does not pass to the buyer. When buying assets from an insolvency administrator, purchasers should therefore negotiate directly with key customers, landlords and licensors, often before signing, and make critical consents a condition to closing. Intellectual property should be checked carefully, as licences granted to the debtor may terminate or be non-transferable.

Employees and business transfers under § 613a BGB

The rules on transfers of undertakings in § 613a of the Civil Code (Bürgerliches Gesetzbuch, BGB) also apply when buying assets from an insolvency administrator. If the purchaser acquires a business or part of a business that retains its identity, the employment relationships of the employees assigned to it transfer to the purchaser by law. Dismissals because of the transfer are invalid.

However, according to the established case law of the Federal Labour Court (Bundesarbeitsgericht), the purchaser is not liable for claims that arose before the opening of the insolvency proceedings, including pension entitlements accrued before opening, which are dealt with in the insolvency and, for pensions, by the statutory insolvency protection. This limitation does not apply to sales before opening.

Restructuring the workforce before the transfer is possible within limits. An administrator can dismiss employees on the basis of the purchaser's restructuring concept, and the special insolvency rules on reconciliations of interests with a list of named employees and court declarations also apply where the operational change is to be implemented only after a sale; in that case, the presumption also covers the question of whether the dismissals were made because of the transfer (§ 128 InsO).

Another common model is a transfer company (Transfergesellschaft), to which employees move under tripartite agreements before the purchaser hires a selected workforce; this structure must be implemented carefully to avoid being treated as a circumvention of § 613a BGB. Our insight on employees in insolvency covers these tools.

Tax, avoidance and other liabilities

One of the main advantages of buying from the estate is protection against historic liabilities. The purchaser's statutory liability for business taxes of the transferor under the Fiscal Code does not apply to acquisitions from an insolvency estate (§ 75(2) AO). According to case law of the Federal Court of Justice, liability for continuing the trading name under § 25 of the Commercial Code (Handelsgesetzbuch, HGB) also does not apply to purchases from an insolvency administrator.

Sales by the administrator in the opened proceedings are not subject to insolvency avoidance, which would be a risk in a pre-insolvency purchase directly from a distressed seller; see our insight on insolvency contestation under § 133 InsO.

Purchasers still need to manage environmental, public law and permit issues, because permits are often tied to the operator or the site and may need to be reissued or transferred with the authority's involvement. Data protection also needs attention when customer data and employee data are transferred. Regulated businesses may need new licences in the purchaser's name, and foreign direct investment screening under the Foreign Trade and Payments Ordinance can apply to acquisitions from an insolvency estate in the same way as to other acquisitions.

Signing, closing and post-closing

Closing mechanics in an insolvency sale are usually simple but strictly sequenced. Typical conditions include creditor approvals, merger control or investment screening clearance where required, release letters from secured creditors and, where needed, consents of key contract partners. The transfer of the business often takes place at a fixed transfer date, with a short interim period during which the administrator continues the business for the purchaser's account. Inventory is counted and valued at closing, and purchase price adjustments are limited to such objective items.

After closing, the purchaser deals directly with the transferred employees, customers and suppliers, while the insolvent company is wound up. Claims for defects or misrepresentations are effectively excluded, so problems discovered after closing must usually be solved commercially. Our pages on distressed M&A and insolvency proceedings explain the wider context.

How TRW & Co helps

We advise strategic and financial investors on buying assets from an insolvency administrator in Germany. We assess targets in short timeframes, structure offers, negotiate purchase agreements with administrators and debtors in self-administration, coordinate releases from secured creditors and suppliers, and plan workforce measures under § 613a BGB and §§ 125 to 128 InsO. We also advise on merger control and foreign investment screening and on securing contract consents before closing. This page is general information, not legal advice. To discuss a matter, please contact us.