Why disregarding the statutory lien realization order in a distressed case can trigger personal liability.
Over the years, ingrained market habits have become established in distressed practice, which in many cases contradict the legal requirements and the case law of the Federal Court of Justice. The article shows that the continued ignoring of the mandatory requirements is not a marginal phenomenon, but a structural risk of distressed transaction practice — a risk that directly affects both M&A advisors and insolvency administrators.
In German M&A practice — especially in transactions in a crisis or insolvency environment — an approach has become established that may appear economically expedient, but which legally constitutes a breach of the statutory realization order (Sections 1228 et seq. of the German Civil Code) and thus gives rise to liability.
Under the term “distressed M&A”, pledges of rights are regularly realized without the pledgor’s current and informed consent provided for by law (Section 1245 BGB). In the practice of distressed transactions and collateral enforcement, it is often overlooked that the pledgor’s prior blanket consent to realization by private treaty (section 1245 BGB) is not a blank check. It must always be up-to-date, informed and related to the specific realization case — especially in the case of company shares or IP rights, where values fluctuate and legal situations change quickly. Especially in crisis situations, these framework conditions almost always change: market value, ownership structure, insolvency risk, creditor interests. Despite this, M&A practice often uses blanket consent clauses that are no longer legally viable. The result: many so-called “private sales” or “structured deals” are not legally compliant. Once consent has been granted, it loses its effect as soon as economic or legal circumstances change significantly.
The legal situation changes fundamentally when insolvency proceedings are opened:
The pledger’s consent expires — an “old consent” does not survive. The insolvency administrator cannot approve the realization of rights or company shares, as section 166 (1) InsO is not applicable (BGH ruling 27.10.2022 — IX ZR 145/21). The right of realization falls to the pledgee, who only has to have pledged rights realized immediately in a public auction in accordance with Section 1235 BGB.
Intangible rights — patents, trademarks, licenses, internet domains — which are reported as assets in the balance sheet are integrated into asset deals in the context of insolvency, although they are legally independent rights and in some cases pledged or not freely transferable. Balance sheet capitalization does not replace the legal process of realization or transfer. This circumvents the right to realize pledges — with liability risks for pledgees, administrators, advisors and purchasers. The statutory lien realization regulations of §§ 1228 ff. BGB are often ignored in these processes.
Numerous transactions are thus structured as “asset deals”, although parts of the transferred intangible assets are included. In practice, this leads to de facto unlawful circumventions of section 1235 of the German Civil Code (BGB), which prescribes public auction as the rule for collateral enforcement of rights. The problem is hardly addressed in the business-related M&A literature — including in Arnd Allert’s standard work “Distressed M&A” (2022), which completely ignores the issue of the separation of rights or collateral enforcement of rights.
In practice, this creates a structural tension between market routine and legal obligations: What seems economically pragmatic is legally impermissible — with considerable liability risks for all parties involved.
The practice of circumvention — “distressed asset packages” as a legal risk
In distressed M&A practice, companies are often broken down into supposedly transferable “asset packages”. These regularly also contain intangible assets — such as licenses, trademark rights, patents or internet domains — which are either not legally transferable (Sections 398, 413 BGB; Section 30 UrhG; Section 69b UrhG) or can be sold by way of public auction (Section 1235 BGB) due to a pledge.
Nevertheless, they are recognized in the balance sheet, valued and listed in purchase agreements. This often serves the purpose of creating the appearance of a high transaction volume or de facto devaluing contractual pledges of rights.
Such constellations constitute a circumvention of Sections 1228 et seq. BGB and can give rise to nullity under civil law (Section 134 BGB) as well as criminal law relevance — particularly if creditors or purchasers are deceived about the legal existence of the transferred assets (Section 263 StGB, Section 266 StGB).
Legal risk: Disregard of pledgees entitled to separate satisfaction in the case of pledged rights
If there is a contractual pledge of rights to company shares, realization by public auction is also mandatory by law (no application of Section 166 (1) InsO). A pledgee cannot consent to a private sale in the event of insolvency.
This is the crucial point: In insolvency proceedings that have been opened, neither the insolvency administrator, the pledgee nor the pledgor himself may give consent to the sale by private treaty (Section 1245 BGB) of pledged company shares or other rights — neither expressly nor impliedly. This is because the pledger loses the power of disposal and administration over the assets when the proceedings are opened (section 80 (1) InsO) and his consent would therefore be legally irrelevant. Consent to private sale (section 1245 BGB) would be a disposition of the type of collateral enforcement — and therefore similar to a disposition, i.e. void (section 134 BGB in conjunction with section 80 InsO).
To summarize:
- The insolvency administrator may not exploit rights himself (no application of Section 166 (1) InsO; BGH ruling 27.10.2022 — IX ZR 145/21),
- the pledger may not give his consent to the realization by private contract,
- - and the pledgee must have the public auction (§ 1235 BGB) carried out immediately.
Personal liability of M&A advisors
In the context of self-administration (Sections 270 et seq. InsO) or restructuring proceedings in accordance with the StaRUG, M&A advisors also face a considerable risk under criminal and civil law if they are involved in the unlawful or unlawful realization of rights with liens or rights to separate satisfaction.
Self-administration is not a legal vacuum. Even if the debtor retains the power of administration and disposal in accordance with section 270 (1) sentence 1 InsO, it is subject to the same insolvency law restrictions and obligations as an insolvency administrator (section 270 (2) sentence 1 InsO). Even in self-administration (sections 270 et seq. InsO) and in the restructuring framework (StaRUG), M&A advisors may not participate in the private sale of rights with liens or rights to separate satisfaction. In insolvency proceedings, the debtor loses the power of free liquidation (Section 80 InsO), and in restructuring proceedings, security rights remain unaffected (Section 12 StaRUG). A private sale of shares without safeguarding the rights to separate satisfaction is unlawful (section 134 BGB), and the advisor exposes himself to a considerable personal civil and criminal risk (sections 823 (2), 27, 266 StGB). § Section 12 StaRUG stipulates that security rights in rem are unaffected; any free disposal of such rights would be contrary to plan and therefore unlawful (Section 134 BGB).
It is not permitted to realize pledged rights by private contract — even in self-administration or in reorganization/restructuring proceedings.
Liability for involvement — when an M&A advisor:
- prepares or structures a private sale of shares, although pledges of rights exist,
- ignores or circumvents the required current and informed consent of the pledger prior to insolvency (§ 1245 BGB),
- or bypasses the statutory utilization regulations (§§ 1228 ff., 1245 BGB),
then it establishes the same liability as in the standard procedure:
- 823 para. 2 BGB in conjunction with. §§ 1228 ff. BGB: Violation of a protective law,
- 830 BGB: Participation in breach of duty by the self-administrator,
- 60 InsO analogously: Joint responsibility in the event of damage to the assets,
- § Section 27, 266 StGB: Aiding and abetting embezzlement or abuse of power of disposal.
Violation of mandatory lien realization standards (§§ 1228 ff., 1245 BGB) and the insolvency law jurisdiction regulations (§ 80 InsO) have legal consequences:
- civil liability (Sections 823 (2), 830 BGB),
- contractual liability (§ 280 BGB),
- criminal liability (§§ 27, 266 StGB),
- Nullity of the transaction (§ 134 BGB) and reversal (§§ 812 ff. BGB).
The legal classification in detail:
- Civil liability (§§ 280 ff., 311 para. 3, 826 BGB)
M&A advisors who are involved in such structures effectively assume legal co-responsibility. Even if they are not formally organs or contracting parties, a legal obligation with protective effect in favor of third parties arises (Section 311 (3) BGB).
Anyone who, in this role, ignores the statutory utilization regulations, makes incorrect legal assessments or actively contributes to the circumvention of § 1235 BGB is personally liable — either for negligent breach of duty (§ 280 BGB) or, in the case of deliberate participation in an unlawful transaction, under § 826 BGB.
The case law of the BGH is clear: advisors who participate in the reduction of the insolvency estate or in the circumvention of mandatory standards are personally liable (BGH, judgment of 13.12.2018 — IX ZR 216/17; BGH, judgment of. 23. 9. 2021 — IX ZR 51/19).
2. insolvency-specific liability (section 60 InsO, section 15b InsO, section 347 HGB)
Advisors who promote transactions that violate the liquidation order during the crisis or after the opening of insolvency proceedings can be held liable. § Section 60 InsO obliges the insolvency administrator to diligently manage the assets; if a third party intentionally or grossly negligently participates in a breach of duty, joint liability arises analogously in accordance with Section 830 BGB.
For consultants, Section 15b InsO (formerly Section 64 GmbHG old version) and the commercial due diligence requirement of Section 347 HGB also apply: Anyone who initiates a legally risky structure as a competent third party acts negligently within the meaning of these provisions in the event of an objective breach of duty.
3. criminal liability (§§ 27, 263, 266 StGB)
In addition to civil liability, there is a risk of criminal liability if the advisor:
- participates in the circumvention of security rights (Section 27 in conjunction with Section 266 StGB),
- commits deception regarding legal admissibility by making false statements (Section 263 StGB),
- or sells entangled objects (Section 136 StGB).
The continuation of M&A processes after the opening of insolvency proceedings is particularly serious. When proceedings are opened, the power of disposal is transferred to the insolvency administrator (Section 80 InsO). Any unauthorized continuation by advisors or managers is null and void (Section 134 BGB).
The BGH (judgment of October 13, 2022 — IX ZR 156/21) has clarified that section 166 InsO does not apply to the realization of rights. This means that an insolvency administrator cannot subsequently approve unauthorized collateral enforcement — it remains unlawful.
Literature and market tradition — the underestimated gap
It is noteworthy that the leading M&A literature largely omits the topic of separation rights. Neither Allert’s “Distressed M&A” (Munich: 2022) nor other widely used handbooks mention section 1235 BGB as a key protective instrument.
This gives the impression that the M&A procedure is legally equivalent to a public auction. This is legally incorrect: the public auction is the procedure provided for by law and legitimized by the state. Sale by private treaty (Section 1245 BGB) remains the narrowly defined exception — not the market standard.
Legal conformity creates trust, market liberalization and liability security
- Section 1235 BGB is not a relic, but the legal guarantee for transparency, equal treatment and market pricing. § Section 1245 BGB is not a flexible option, but a narrow exception subject to approval.
Those who observe these principles act in a legally compliant, liability-proof and economically rational manner. The public auction offers clear, objective and verifiable advantages over the private M&A sale:
- Legal conformity: legally legitimized procedure pursuant to Section 1235 BGB.
- Finality: award as sovereign act (Section 383 BGB new version) — no renegotiation, no conditions precedent.
- Transparency: same information situation, same access conditions (NDA) for all verified bidders (KYC/AML, sanctions)
- Freedom from liability: documented market pricing; the pledgee demonstrably fulfills its obligations (Section 280 (1) sentence 2 BGB), confirmation of the requirements under civil law.
- Efficiency: fixed deadlines, standardized procedures, clear cost structure.
- Full legal effect:
- exclusion of warranty pursuant to section 445 BGB — the acceptance of the bid terminates the procedure without subsequent liability for defects,
- acquisition in good faith pursuant to section 935 (2) BGB — the purchaser also acquires ownership of previously pledged rights (bearer securities).
— final and incontestable determination of value — the award documents the objective market value in a sovereign and conclusive manner.In this way, the public auction achieves what traditional M&A processes regularly fail to guarantee: legal clarity, economic finality and a clear, unassailable determination of value.
In contrast, the continued practice of distressed M&A liquidation without observing the pledge liquidation regulations leads to legal uncertainty, risks of avoidance and potential personal liability for the parties involved.
Deutsche Pfandverwertung stands for the opposite of these risks when properly implemented: it combines legal precision, economic efficiency and sovereign legitimacy. Where negotiations end and legal consequences begin, the public auction achieves what M&A structures cannot — legal conformity, market liberalization and final commitment.
Market routine, insolvency practice and legal obligation — a systematic comparison
In German transaction practice, particularly in so-called distressed M&A cases, an approach has become established that may appear economically expedient, but is legally unlawful. Both M&A advisors and insolvency administrators often refer to market practice, procedural economy or practical constraints — and overlook the fact that sections 1228 et seq. BGB form a mandatory, conclusive pledge realization regulation. The statutory rule is public auction (section 1235 BGB); private sale (section 1245 BGB) is a strictly limited exception. If this structure is disregarded, the consequences are serious: illegality, nullity (§ 134 BGB) and personal liability (§ 60 InsO, § 347 HGB).
First — The perspective of the M&A advisor
M&A advisors argue that section 1245 BGB allows for flexible handling of collateral enforcement. The pledger’s consent can be implied or “continue to have effect” from previous agreements. In a crisis or insolvency situation, quick action is required; it is therefore “customary in the market” to work with blanket consent clauses or tacit acquiescence. Economic expediency is invoked and it is claimed that a public auction is too formal, too complicated and too slow.
This representation is substantively incorrect and legally unfounded.
The public auction is the most structured, fastest and most efficient procedure:
It follows a proven, standardized procedure, is based on existing legally compliant contracts, uses its own digital infrastructure with global reach, enables professional market development and relies on an established international network of investors.
It is therefore neither bureaucratic nor delayed, but on the contrary — transparent, standardized and highly efficient.
In contrast, traditional M&A processes are actually slow, overly complex, contentious and cost-intensive:
They require extensive contracts to be drawn up, separate data rooms, lengthy due diligence processes, reservations of approval and often multi-stage negotiations.
It is precisely these structures, which usually last 3 to 12 months, as well as retainers, unpredictable hourly fees and success fees, that make M&A time-consuming and cost-intensive, whereas the public auction is fast, transparent and final.
In legal terms, section 1245 BGB requires the pledger’s consent to be current, informed and related to the specific case of realization (see Palandt/Ellenberger, section 1245 para. 1 f.; MüKoBGB/Schwab, section 1245 para. 4–6). A blanket or anticipated consent is expressly invalid pursuant to Section 1245 para. 2 BGB. An alleged “customary market practice” does not replace a legal basis. Customary law contra legem does not exist (BGHZ 75, 183 = NJW 1980, 2738).
Any realization by private treaty in the pre-insolvency context without current consent violates mandatory law (Section 134 BGB). The pledge of rights remains in place (Section 1252 BGB) and the purchaser does not acquire unencumbered ownership. § Section 1245 para. 2 BGB is also to be regarded as a protective law within the meaning of section 823 para. 2 BGB, as it protects the pledger from overreaching in pressure situations and safeguards the mandatory realization order. Upon the occurrence of insolvency, the realization of pledged company shares and other rights is only permitted by way of public auction in accordance with section 12 35 BGB.
Secondly: The insolvency administrator’s perspective
Insolvency administrators also regularly argue on the basis of economic expediency. They see themselves as the “master of the proceedings” (sections 80, 148 InsO) and derive from this a de facto authority to approve the realization of pledged rights. Section 166 InsO — which regulates the realization of movable property — is often applied analogously to rights. This is said to mean that the administrator can approve private sales of shareholdings, licences or intangible rights as part of an asset deal in order to optimize the assets and promote the preservation of the company.
This argument is untenable in terms of legal doctrine. § Section 166 (1) InsO relates exclusively to tangible assets; the standard does not apply to rights, company shares or intangible assets. The BGH, judgment of October 27, 2022 — IX ZR 145/21, has expressly confirmed this. The insolvency administrator therefore has no legal authority to carry out, approve or commission collateral enforcement of rights himself.
Nevertheless, it is often claimed in practice that the pledger’s consent continues to exist or is “replaced” by the administrator’s approval. In fact, the pledgor’s consent expires when insolvency proceedings are opened because the pledgor loses his power of disposal (section 80 (1) InsO). A pre-insolvency consent is not effective, as section 1245 (2) BGB expressly prohibits a waiver of the statutory realization rules prior to the commencement of the right to sell. The insolvency administrator cannot replace the consent, as he has no material entitlement to the pledged property. Any realization based on this is unlawful and void (Section 134 BGB). § Section 1245 (2) BGB is also to be regarded as a protective law within the meaning of section 823 (2) BGB, as it protects the pledger against overreaching in pressure situations and safeguards the mandatory realization order.
The widespread equation of balance sheet capitalization with legal usability in insolvency practice is particularly problematic. Many administrators regard intangible rights — patents, trademarks, software, licenses — as “economic assets” and integrate them across the board into asset deals. However, recognition in the balance sheet does not replace the legal process of transfer or utilization (Sections 413 et seq. BGB). Each of these rights is subject to its own transfer regulations and, if applicable, a pledge of rights. If such rights are utilized without complying with Sections 1228 et seq. BGB, this constitutes unlawful interference with a right to separate satisfaction, which not only leads to the nullity of the transaction (Section 134 BGB), but also to the personal liability of the insolvency administrator pursuant to Section 60 InsO. This liability is in addition to the general obligation to pay damages (Section 280 BGB) and may also be relevant under criminal law in the event of gross negligence or deliberate disregard of the statutory realization order (Section 266 StGB).
The argument that a public auction is “not practicable” is incorrect.
The public auction in particular is standardized, proven and fully digitalized.
It enables legally compliant procedures to be carried out in the shortest possible time, the retrieval of existing contract templates and the immediate worldwide market development via an existing network of professional investors.
It is therefore not only practicable, but also the most efficient, transparent and legally compliant way to exploit assets.
The insolvency administrator is not a discretionary body, but part of the administration of justice (Section 1 InsO) and is therefore bound by law and justice (Article 20 (3) GG). Economic expediency must not lead to the circumvention of mandatory law.
Thirdly: The perspective of the statutory lien realization regulations (§§ 1228 ff. BGB, § 166 InsO)
Sections 1228 et seq. BGB form a mandatory and conclusive order of realization.
According to Section 1235 BGB, public auction is the rule,
according to Section 1245 BGB, realization by private contract is only permitted with current, informed consent,
and Section 166 InsO exclusively regulates the special case of tangible assets — it does not apply to rights (BGH IX ZR 145/21).
This system serves to protect the pledger, the equal treatment of creditors (Section 1 InsO) and the legal certainty of all parties involved.
A violation of this order has clear consequences:
- illegality and nullity of the realization transaction (Section 134 BGB),
- continued existence of the pledge of rights (Section 1252 BGB),
- reversal in accordance with Sections 812 et seq. BGB,
- liability of the pledgee (Section 280 BGB),
- personal liability of the insolvency administrator (Section 60 InsO) and, if applicable, criminal liability (Section 266 StGB).
The public auction is not just a procedural mechanism, but a legal act legitimized by the state. The knockdown (Sections 156, 383 BGB as amended) brings the procedure to a final, legally binding and incontestable end. It creates transparency, legal clarity and market fairness — values that cannot be replaced by market practice or economic pressure.
Conclusion: Law instead of habit — legal conformity is mandatory!
Both M&A advisors and insolvency administrators like to invoke custom, market standards or economic common sense. However, these arguments are legally irrelevant. Customary law contra legem does not exist, and Section 1235 BGB leaves no room for informal collateral enforcement practices.
Collateral enforcement follows a mandatory set of rules:
- § SECTION 1235 BGB: Public auction as a rule,
- § SECTION 1245 BGB: Exploitation by private contract only with current consent,
- § Section 166 InsO: No application to rights (BGH IX ZR 145/21),
- § Section 60 InsO: Personal liability of the insolvency administrator for unlawful dispositions.
What is considered pragmatic in transaction practice is legally inadmissible.
Disregarding the statutory realization order is not a market standard, but a violation of the law.
The public auction is not a bureaucratic relic, but a modern, efficient and legally compliant procedure with clear processes, tested contract templates, global reach, professional market development and established investor access.
The insolvency administrator remains an organ of the administration of justice and bears personal responsibility for the legal conformity of his actions.
What appears to be “market practice” is not law — it is simply illegal in these cases.
Bibliography and list of standards
BGB: §§ Sections 90, 1228–1252, 134, 156, 280 et seq., 311 para. 3, 347, 398, 413, 445, 823, 826
InsO: Sections 1, 35, 47, 50–52, 60, 80, 97, 129, 166
HGB: § Section 347
StGB: Sections 27, 136, 263, 266
BGH:
- BGH, Urt. v. 13. 12. 2018 — IX ZR 216/17
- BGH, Urt. v. 23. 9. 2021 — IX ZR 51/19
- BGH, judgment of 27.10.2022 — IX ZR 145/21
Commentaries:
- Palandt/Ellenberger, BGB, 83rd ed. 2024, §§ 1235–1245 marginal nos. 1–6
- MüKoBGB/Schwab, 9th ed. 2023, §§ 1235–1245
- Staudinger/Bittner, BGB (2022), § 1245 marginal nos. 5 ff.
Literature:
- Allert, Arnd: Distressed M&A — Kauf und Verkauf von mittelständischen Unternehmen in wirtschaftlichen Krisenzeiten, Munich: Franz Vahlen, 2022 (p. 207)
Author
Fritz Eberhard Ostermayer
President of BvV e.V. (Berlin) — Bundesverband öffentlich bestellter, vereidigter und besonders qualifizierter Versteigerer
General publicly appointed and sworn auctioneer for all types of auctions (§ 34b GewO)
IfUS-certified restructuring & reorganization consultant (Heidelberg)
Over 15 years of experience in the liquidation of company shares
Contact:
E‑mail: office@deutsche-pfandverwertung.de | Phone: 08027 908 9928
Disclaimer
The information, assessments and legal explanations contained in this article are for general technical information purposes only. They do not constitute legal advice in individual cases and cannot replace an individual legal examination by a lawyer.
Deutsche Pfandverwertung does not act as legal advisors, but as publicly appointed, sworn auctioneers, specialists in the realization of rights and collateral assets within the framework of legally prescribed procedures and as certified reorganization and restructuring consultants.
All content is based on publicly accessible sources, relevant case law and practical experience from exploitation practice. Liability for the accuracy or completeness of the content is excluded.
We are publicly appointed, sworn auctioneers (auctioneers) with over 15 years of experience in the realization of legal and contractual pledges of rights in legally compliant online auctions with live stream.
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