Legal pitfalls of buying a distressed company part II – the role of the insolvency practitioner


published on October 04, 2018

If a buyer takes over a company out of insolvency, the insolvency practitioner is the buyer's main negotiating partner. Furthermore, the interests of the creditors' committee must be considered.

After opening of the insolvency proceedings, the insolvency practitioner has the exclusive right to administer and dispose of the insolvent company's assets. The insolvent's assets can thus be acquired only by the insolvency practitioner. The insolvency practitioner does not, however, act as the owner but mainly represents the interests of the company's creditors. This means that he must ensure that the assets of the insolvent company are increased to the greatest possible extent.

Buyers often assume that the insolvency practitioner's task is to preserve as many jobs as possible. According to the Insolvency Statute [German: Insolvenzordnung], this assumption is wrong. From the legal perspective, the insolvency practitioner is interested in preserving jobs as long as the taking over of employees reduces the burden on the insolvent's assets that would otherwise result from wage and salary claims.

In the process of negotiations it must also be considered that the insolvency practitioner – pursuant to the provisions of the Insolvency Statute – shall be liable for damage if they are in breach of his statutory obligations.  Basically, if several bidders are interested in the acquisition, the insolvency practitioner will accept a bid of such an investor or a company that submits the economically most advantageous bid, which in turn would mean the highest possible proceeds from the liquidation of the insolvent's assets. Unlike to the business owner, the feasibility of a business plan of the prospective buyer is of secondary importance to the insolvency practitioner.

The interests of creditors must also be considered when buying a company out of insolvency

The interests of creditors in the insolvency proceedings are represented by the meeting of creditors and, where appropriate, by the creditors' committee. This implies that buying a company out of insolvency, is subject to the consent of creditors in certain cases. Therefore, in accordance with the provisions of the Insolvency Statute, the insolvency practitioner is entitled to dispose of the company only if he has obtained a consent of the creditors' committee or the meeting of creditors. Although a breach of the consent requirement does not affect the validity of the sales and purchase agreement, the insolvency practitioner may become liable for damages under certain circumstances.
Therefore, it is very common in practice that the insolvency practitioner initially proposes to make the contract subject to a condition subsequent that the meeting of creditors does not grant a consent. However, this leads to considerable uncertainty in the period between signing the contract and granting a consent by the meeting of creditors. In most cases, the buyer must make investments immediately to be able to maintain or resume the business operations of the company acquired. It is therefore advisable for the buyer to insist on appointing a (preliminary) creditors' committee that could give its consent to the transaction immediately after the opening of insolvency proceedings so as to avoid or shorten the period of legal uncertainty to the maximum.
Banks occupy a privileged position among all creditors, since their claims against the company are usually very well secured. They are usually entitled to the so-called separate satisfaction (e.g. a land charge or equitable lien). By virtue of this privilege, the bank's claims have priority if a relevant portion of the insolvent company's assets is disposed of.  This of course matters to the insolvency practitioner (depending on the purchase price) as it affects the attractiveness of the bid since it may turn out that the insolvency practitioner must spend the whole purchase price (minus a lump sum for the costs of determining and disposing of an object) on paying the claims secured by the banks.

The buyer must convince both the insolvency practitioner and creditors

When a company is acquired out of insolvency, a negotiation with the insolvency practitioner is essential, but – first and foremost – attention should always be paid to the creditors' interests. The transaction can be concluded successfully only if the meeting of creditors consents to it. In this process, banks play a special role among the creditors. Therefore, in exceptional cases, it would be advisable to invite them to the negotiating table.



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Nadine Schug

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