M&A termination at the opening of insolvency proceedings is mandatory for separations of pledged company shares and IP rights.
Once insolvency proceedings have been opened, liquidation by the insolvency administrator is not permitted; approval or continuation of M&A processes that have already begun is legally excluded.
When insolvency proceedings are opened, the debtor loses the power of disposal over the assets belonging to the estate in accordance with Section 80 (1) InsO. Ongoing M&A processes aimed at the sale of pledged company shares or other rights may therefore not be continued. In its ruling of October 27, 2022 (case no. IX ZR 145/21), the Federal Court of Justice clarified: “Section 166 (1) InsO does not apply to the realization of rights. The insolvency administrator cannot approve the disposal of a debtor who is no longer authorized to dispose if the object is a right.” A continuation without a legal basis would be unlawful and may have consequences under liability law in accordance with Section 60 InsO.
In practice, M&A processes are nevertheless often continued — sometimes under the guise of an “investor continuation”, sometimes by formally renaming them as “continued proceedings”. The data room remains open, interested parties continue to have access and it is claimed that they are now acting “on behalf of the insolvency administrator”.
If the insolvency administrator has in fact unlawfully approved such a continuation, the M&A advisor is nevertheless obliged to interrupt the proceedings immediately in order not to exposehimself to liability and penalty risks.
The unlawful continuation of an M&A process despite existing pledges of rights can be relevant under official criminal law — in particular in the context of Section 266 StGB (breach of trust). At the same time, it gives rise to claims for damages under civil law:
- against the insolvency administrator from 60 InsO, if the latter circumvents the statutory realization regulations (Sections 1235 et seq. BGB) in breach of duty or violates the equal treatment of creditors,
- against the M&A advisor from Section 823 (2) BGB in conjunction with Section 266 StGB. § Section 266 StGB and Section 826 BGB if he is aware of the unauthorized continuation or accepts it,
- if applicable, against the pledgee himself if he actively participates in the unlawful continuation or tolerates it although he is aware of the breach of duty. In this case, contributory causationor contributory negligence (Section 254 BGB) may arise,
- jointly and severally liable (§ 840 BGB)between the insolvency administrator, advisor and pledgee, insofar as they jointly or in concerted action contribute to causing damage — for example through delay, loss of value or the thwarting of a statutory auction (§ 1235 BGB).
It is therefore clear that the continuation of an M&A process in the event of insolvency despite existing pledges of rights is not only unlawful, but can — depending on the participation situation — establish a chain of liability between the insolvency administrator, advisor and pledgee. It undermines the statutory realization order and leads to a civil and criminal liability situation that affects all parties involved if they recognize or must recognize the illegality. Ignorance does not provide protection if it was avoidable or self-inflicted.
Professional actors in particular (e.g. consultants, auctioneers, administrators, creditors with legal departments or public law institutions such as savings banks) have an increased duty of care.
In practice, M&A therefore often incorrectly treats recognized rights as asset components by declaring them economically together with physical assets to form an overall package (“asset deal”), although they remain legally independent rights and are not transferable under property law. M&A processes that treat rights as objects and consequently replace them with the administrator’s approval in the event of insolvency misjudge the legal system and operate outside the legal framework. Rights are not things (Section 90 BGB), Section 166 InsO does not apply.
Legal findings: No approval possible
According to the Insolvency Code, orders without authority are void. The Federal Court of Justice clarified this in its ruling of 27 October 2022 (case no. IX ZR 145/21):
“Section 166 (1) InsO does not apply to the realization of rights. The insolvency administrator cannot approve the disposal of a debtor who is no longer authorized to dispose if the object is a right.”
It is therefore clear:
- The insolvency administrator cannot grant permission for the realization of rights.
- A subsequent cure of the process is excluded.
- Any realization or continuation of an M&A process without public proceedings is unlawful and void.
The realization of such rights — in particular company shares, receivables or intangible rights — can only be carried out in accordance with the law, namely by public auction in accordance with Sections 1228 et seq. and 1235 BGB.
No authorization to exploit rights
The insolvency administrator may also not realize rights — such as shares, claims or other intangible property rights — himself. These are not subject to his power of administration and disposal because they are not tangible assets. He is therefore neither authorized to dispose of them nor authorized to approve them; any liquidation carried out by him would be unlawful and void.
The statutory form of realization of such rights is the public auction (§ 1235 BGB). It guarantees legal conformity, transparency and finality. Other forms of realization or bidding by the insolvency administrator are inadmissible and give rise to liability (Section 60 InsO).
Collateral enforcement as a special right of the pledgee
If company shares or rights are pledged, their realization is not automatically included in the insolvency proceedings. The pledge of rights remains a separate right (Section 50 InsO, Sections 1228 et seq. BGB). The pledgee has a preferential right to satisfaction from the pledged object — irrespective of the insolvency.
Prior to the opening of insolvency proceedings, the pledgee may, in principle, realize the item themselves in accordance with Section 1228 (2) BGB, usually by public auction (Section 1235 BGB). After the opening of insolvency proceedings, the asset is generally realized by the insolvency administrator in the interest of the pledgee (section 166 InsO). However, the following applies to rights — in particular company shares: Section 166 InsO is not applicable (BGH IX ZR 156/21). The insolvency administrator cannot therefore realize or approve the pledge in place of the pledgee; the pledge of rights remains outside the estate.
Pledgee and insolvency plan — legal incompatibility
The insolvency plan (Sections 217 et seq. InsO) is a collective procedure that affects all creditors. It is aimed exclusively at insolvency creditors (Section 38 InsO), not at those entitled to separate satisfaction (Section 50 InsO). A lien creditor realizes its security interest outside the estate and is therefore not part of the plan coordination. It only participates in the proceedings to the extent that its claim remains unsecured (section 52 InsO). Consequently, the pledgee does not agree to the insolvency plan and does not have to agree to it, as its right of realization may not be disposed of by the plan.
If an insolvency administrator attempts to regulate the form of realization or the proceeds of a pledged share via the insolvency plan, this leads to a de facto expropriation of the pledgee in favour of the estate. This violates the principle of separation (sections 50 et seq. InsO), the special right of the pledgee and the constitutionally protected property position. The Federal Constitutional Court and the Federal Court of Justice have repeatedly emphasized that an insolvency plan may not interfere with the absolute rights of third parties (e.g. pledges of rights).
Furthermore, a pledgee may not consent to an insolvency plan if it includes the realization of his pledged right. Consent would be unlawful and contrary to duty, especially for banks or public institutions that are obliged to protect the interests of third parties (Section 1 InsO). The legally compliant solution is exclusively the public auction as a sovereign realization pursuant to Section 1235 BGB; a private sale is no longer an option in the event of insolvency pursuant to Section 1245 BGB. This ensures legal conformity, equal treatment of creditors and a final, incontestable realization.
Conclusion
Deutsche Pfandverwertung stands for the legally compliant and final handling of collateral enforcement proceedings. Every M&A process aimed at the realization of shares or rights ends with the opening of insolvency proceedings. The insolvency administrator may neither approve nor realize the assets himself. The only permissible form of liquidation is the legally standardized public auction in accordance with Section 1235 BGB, which guarantees transparency, equal treatment and finality. The award (§ 156 BGB) is not a contract, but a legally binding act of sovereignty — final, incontestable and not subject to renegotiation. This means that the procedure ends where M&A reaches its legal limits.
This information does not replace legal advice in individual cases.
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