Insight

Acquiring a Business out of Insolvency

The course of a distressed M&A process, asset deal, liability risks, employees, assumption of contracts and negotiations with the insolvency administrator.

24 July 2026 | Reading time 8 min. | Author: Johannes Egelhof LL.M.

In brief

An acquisition out of insolvency is usually not a classic M&A process with long exclusivity phases and comprehensive warranty catalogues. The insolvency administrator must stabilise the business, secure liquidity and at the same time achieve the best possible realisation for the creditors. Prospective buyers therefore need, at an early stage, a robust transaction concept, clear financing and a team that can work on legal, operational and financial questions in parallel.

In practice, the business is frequently taken over by way of an asset deal. The buyer acquires, in a targeted manner, machinery, inventories, intellectual property rights, customer relationships, real estate or other operationally required assets. Liabilities in principle remain with the insolvent legal entity, in so far as they are not expressly assumed or pass by operation of law. It is precisely this separation that makes the distressed asset deal attractive. It is not, however, seamless and does not replace an examination of the remaining liability and continuation risks.

An acquisition out of insolvency is usually structured as an asset deal. The buyer acquires the operationally required assets in a targeted way, while liabilities in principle remain with the insolvent entity.
For acquisitions from the insolvency estate, liability for continuation of the firm under Section 25 HGB and the acquirer's tax liability under Section 75 AO are in principle excluded.
Where a business is taken over with its identity preserved, employment relationships nevertheless pass to the buyer under Section 613a BGB. Dismissals solely on account of the transfer are ineffective.
Contracts do not pass automatically and their transfer regularly requires the counterparty's consent. Third-party security interests in machinery, inventories and receivables must be resolved by closing.
The insolvency administrator typically sells under a far-reaching exclusion of liability and prefers a fixed price fully available at closing. Particularly significant legal acts require creditors' committee consent under Section 160 InsO.

How does a distressed M&A process proceed?

The process frequently begins as early as the insolvency opening procedure. A preliminary insolvency administrator or management in preliminary debtor-in-possession proceedings examines whether the business can be continued and an investor found. M&A advisers approach potential buyers, make initial information available after the signing of a confidentiality agreement and request indicative offers.

The due diligence is usually considerably shorter than in a solvent transaction. It concentrates on the assets that the buyer actually needs, on ownership, security interests, employees, material contracts, official permits and short-term liquidity requirements. In parallel, the buyer must develop a continuation concept. The insolvency administrator wishes to see a purchase price and equally to know whether the financing, transfer of undertaking and closing will work in practice.

After a binding offer follow the contract negotiation and coordination with secured creditors, the creditors' committee and, where applicable, further parties to the proceedings. The decision is frequently not made solely on the highest nominal purchase price. Transaction certainty, speed, continuation costs, the taking over of employees and the likelihood of a smooth completion influence the economic value of the offer.

Why is the acquisition usually made as an asset deal?

In the asset deal, the buyer can in principle itself assemble the object of acquisition. It takes over, for example, machinery and plant, inventories, trade marks, domains, software, customer lists or real estate, without acquiring all the historical obligations of the insolvent company. The insolvent legal entity continues to exist and is regularly wound up after realisation.

This selectivity has limits. Each asset must be legally sufficiently determined and effectively transferred. For movable property, ownership and possession must be clarified. Real estate requires notarial recording and entry in the land register. Trade marks, patents, domains and software licences follow their own transfer rules. Receivables may be assigned but may be subject to prohibitions on assignment, objections or security interests.

A share deal also comes into consideration, above all in the case of regulated undertakings, permits that are difficult to transfer or a company-law plan solution. It takes over, however, the company with its liabilities and insolvency-law encumbrances. The economic advantage of a targeted delimitation of liability is then smaller.

Which liability risks remain in the asset deal?

The basic idea is that the buyer bears only the expressly assumed liabilities. For the acquisition of a commercial business out of insolvency, the Federal Court of Justice has in principle excluded the general liability for continuation of the firm under Section 25 HGB. This also applies to a disposal by the debtor in debtor-in-possession proceedings. The tax liability of the acquirer under Section 75 AO likewise does not, by statute, apply to acquisitions from an insolvency estate.

Liability questions are not thereby settled. Employment relationships may pass by operation of law under Section 613a BGB. Environmental or public-law responsibilities may attach to ownership of real estate, the operation of plant or actual physical control. Product liability, warranty for products delivered after closing, data protection, contaminated sites and the continuation of trade marks or customer communication must be examined separately.

Particular care is required where the acquisition is to be completed before the opening of proceedings or does not clearly take place out of the insolvency estate. Insolvency-law privileges may then not apply in the same way. A de facto anticipation of the acquisition before closing may also create new risks.

What role do third-party security interests play?

Machinery, inventories and receivables do not always belong economically free to the insolvency estate. Suppliers may assert retention of title. Banks frequently hold transferred security ownership, global assignments or land charges. Leased assets are regularly owned by the lessor.

The insolvency administrator may realise certain assets encumbered by security, but must have regard to the rights of those entitled to separate satisfaction. For the buyer, it is decisive that it obtains unencumbered ownership or a precisely defined legal position. The purchase agreement should therefore determine which releases are required, who obtains them and whether the purchase price flows in whole or in part directly to secured creditors.

A mere listing in the data room is not sufficient. Chains of ownership, serial numbers, security agreements and release declarations must be traceable up to closing. Otherwise there is a risk that operationally required plant is indeed on the premises but cannot be effectively acquired.

Do customer and supply contracts pass automatically?

Contracts do not in principle pass automatically to the buyer in an asset deal. The transfer of a contract regularly requires the consent of the contractual partner. This concerns in particular customer contracts, supply agreements, leases, maintenance services, software licences and financing agreements.

For mutual contracts not yet fully performed, the insolvency administrator has, under Section 103 InsO, a right of election as to whether to demand performance or refuse it. This insolvency-law right of election does not, however, replace consent to the transfer to an acquirer. For the buyer, it must therefore be clarified early which contracts are indispensable and which contractual partners may be approached.

In practice, assumptions of contract are frequently structured as a closing condition, a subsequent obligation or a transitional arrangement. The seller may temporarily continue to provide services in its own name, in so far as this is legally and operationally permissible. Such transitional solutions should be closely time-limited, because the insolvent legal entity is not permanently available as a contractual platform.

What applies to employees in an acquisition out of insolvency?

Where a business or part of a business is taken over with its identity preserved, the assigned employment relationships in principle pass to the buyer under Section 613a BGB. Whether a transfer of undertaking exists does not depend on the designation in the purchase agreement. What is decisive is the actual taking over and continuation of the economic entity.

Insolvency does not eliminate the transfer of undertaking. According to the case law of the labour courts, however, the insolvency-law distribution rules limit the acquirer's liability for certain claims that are economically attributable to the period before the opening of proceedings. New claims and the continuation of the employment relationships from the transfer, by contrast, in principle affect the acquirer directly.

Personnel measures before the sale must be coordinated with the insolvency administrator, the works council and the transaction structure. The Insolvency Code contains special rules on notice periods, reconciliation of interests, name lists and social plans. An acquirer may not simply steer the selection of the employees to be taken over detached from the law on transfers of undertaking. Dismissals solely on account of the transfer are ineffective.

How are permits, certifications and public-law positions treated?

Not every permit can be transferred to a new legal entity. Some authorisations are tied to the person of the operator, others follow the installation or must be applied for anew. This is particularly relevant for industrial plant, waste and environmental law, medical devices, financial services, aviation, energy, transport and security-relevant activities.

The buyer should prepare a permit matrix early. It shows which authorisations are needed for the first day of operation, whether a notification is sufficient or a full authorisation procedure is required. Between signing and closing, coordination with the authorities may be necessary. Where an indispensable permit is lacking, an acquired machine park alone is of no help.

Certifications, customer approvals and audit status may also be economically decisive, even though they do not constitute state permits. The purchase agreement should regulate what support the insolvency administrator and the target company provide in the re-application or transfer.

How does the purchase agreement differ from a normal acquisition?

The insolvency administrator typically sells under a far-reaching exclusion of warranty and liability. He does not know the company from his own operational responsibility and may not encumber the estate with far-reaching warranties. The buyer therefore receives considerably less contractual protection than in an ordinary M&A agreement.

The precise description of the object of acquisition, the acts of transfer and the closing conditions become all the more important. The agreement must clarify which assets are transferred free of third-party rights, how inventories are counted, receivables allocated and portions of the purchase price attributed. For indispensable facts, objective conditions to completion may be more suitable than damages warranties.

Purchase-price mechanisms are frequently simpler and more payment-oriented. Insolvency administrators prefer a fixed purchase price that is fully available at closing. Escrows, earn-outs or long-term deferrals of the purchase price are accepted only where they do not unreasonably endanger the realisation proceeds.

How does one negotiate with the insolvency administrator?

A robust offer addresses the interests of the proceedings. These include the purchase price, financing certainty, the planned scope of the taking over of employees, the transitional services needed, the regulatory conditions and the earliest possible completion. Open financing or committee reservations weaken an offer considerably.

At the same time, the insolvency administrator needs a fair and documentable process. For particularly significant legal acts, the consent of the creditors' committee or, where none is appointed, of the creditors' meeting is to be obtained under Section 160 InsO. Secured creditors must be involved where their rights are affected. The buyer should therefore not assume that an economic agreement with the administrator alone already leads to the award.

Success in negotiation frequently arises through preparation. Anyone who presents a complete asset list, a realistic date of takeover and clear contractual positions early reduces the completion risk. This can be economically more valuable than a higher but uncertain purchase price.

What must be secured between signing and closing?

The period should remain short. Up to closing, customers may leave, employees may resign, inventories may be consumed or orders lost. The purchase agreement therefore needs rules on the continuation of the business, the preservation of the assets and the exchange of information. At the same time, the buyer may not assume operational control prematurely.

Required consents to assumptions of contract, releases of security interests, merger control and, where applicable, investment control must fit into the timetable. In the case of a transfer of undertaking, the information to employees must be prepared. IT migration, bank accounts, insurance and the ability to deliver on the first day after closing require their own implementation plan.

A distressed deal rarely fails on a single legal clause. What is critical is rather whether the asset transfer, personnel, contracts, permits and financing interact on the same day. The legal structure must therefore be developed from the desired operational starting point.

About the author

Johannes Egelhof LL.M.

Partner · M&A & Corporate

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Johannes Egelhof LL.M. advises investors, companies and insolvency administrators on distressed M&A transactions and cross-border restructurings. He combines transaction structure, insolvency law and operational completion planning.

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Frequently asked questions about acquiring a business out of insolvency

Why is an insolvent business usually sold as an asset deal?

The buyer can acquire operationally required assets in a targeted manner, while the historical liabilities in principle remain with the insolvent legal entity. Statutory transfers of liability and special public-law risks must nevertheless be examined.

Is the buyer liable for the company's old debts?

In principle only where it expressly assumes them or a statutory liability applies. Employment relationships, environmental responsibility or other statutorily ordained consequences may be independent of the contractual selection of the assets.

Do customer contracts pass automatically to the buyer?

No. In an asset deal, the consent of the contractual partner is regularly required. Indispensable contracts should therefore be identified early and their transfer secured as a closing condition or transitional arrangement.

Which employees must the buyer take over?

In the case of a transfer of a business or part of a business, the assigned employment relationships pass by operation of law. What is decisive is the economic entity actually continued, not a selection formula in the purchase agreement.

Does the insolvency administrator give warranties?

Usually only very limited ones. The object of acquisition, the transfer of ownership, releases and conditions to completion must therefore be regulated particularly precisely and verified in the due diligence.

Who decides on the sale?

The insolvency administrator or, in debtor-in-possession proceedings, the debtor conducts the negotiation. For particularly significant realisation measures, the creditors' committee or creditors' meeting is regularly to be involved. In addition, secured creditors may have to consent.

How quickly can an acquisition out of insolvency be completed?

The process can proceed considerably faster than an ordinary acquisition. The actual duration depends above all on financing, assumptions of contract, employee questions, releases of security interests and official clearances.