Realization of pledged company shares or rights in the event of insolvency

Key practical tips that show how liability risks can be avoided during implementation.

In the practical routine of proceedings, property law is often erroneously applied to rights, which regularly leads to unlawful misapplications. The realization of pledged company shares or other rights is subject to a clear legal framework in the event of insolvency. According to §§ 1228 ff. BGB, the public auction (Section 1235 BGB) is the statutory standard form — not the private sale (Section 1245 BGB). When proceedings are opened, the applicability of section 1245 BGB ceases to apply: The insolvency administrator is not authorized to dispose of the property (section 80 InsO), nor is the pledger. There is typically no market price. If there is a market or stock exchange value, the sale must be carried out by a commercial broker or a person authorized to conduct public auctions in accordance with Section 1221 BGB.

No sale by private treaty in accordance with Section 1245 BGB possible in the event of insolvency

In its ruling of 27.11.2022 — IX ZR 145/21, the Federal Court of Justice clarified that 166 (1) InsO only applies to physical assets. Rights — such as company shares, trademarks, patents, IT domains, licenses — are not eligible for possession. This means that the insolvency administrator generally lacks a statutory power of realization; an analogous application of section 166 (1) InsO is ruled out. The realization of pledged rights is the sole responsibility of the pledgee pursuant to sections 1273 et seq. BGB in conjunction with § 1235 BGB (public auction).

In the event of insolvency, the pledger is legally prevented from concluding an agreement with the pledgee on a private sale in accordance with Section 1245 BGB, as his power of disposal is transferred to the insolvency administrator in accordance with Section 80 InsO.

After the opening of insolvency proceedings, no effective agreement can therefore be concluded between the pledgee and the insolvency administrator as the representative of the pledger regarding the type of realization of pledged company shares or other rights. Consent to realization by private treaty pursuant to section 1245 BGB can no longer be granted, as the insolvency administrator has no private autonomous freedom of action (sections 80, 166 InsO). This means that the public auction (Section 1235 BGB) is the only permissible and legally compliant form of realization in the event of insolvency for pledged company shares or other rights. Any agreement deviating from this is null and void (Section 134 BGB) and can trigger liability consequences (Section 60 InsO) for the insolvency administrator and the pledgee involved.

The insolvency administrator may neither grant a new legal consent to realization by private treaty nor conclude a subsequent agreement with the pledgee on the type of realization; nor may a different form of realization (e.g. M&A process, contractual bidding procedure or sale) be agreed. Such an agreement would be unlawful and void, as it would violate the mandatory statutory realization provisions (Sections 1228 et seq. BGB in conjunction with Section 16 (1) InsO).

This also applies to self-administration: this only changes the procedural framework, not the statutory liquidation powers. The debtor remains the master of the proceedings, but acts under the supervision of the administrator (section 274 InsO). Obligations towards creditors entitled to separate satisfaction and the principle of equal treatment (Section 1 InsO) remain unaffected.

The insolvency administrator can consult the creditors’ meeting on the type of realization. According to the BGH ruling IX ZR 145/21, the realization of pledged rights falls exclusively to the pledgee. Only the party with the statutory right of realization is responsible for choosing the type of realization. The hearing has no legally binding effect; the creditors’ meeting has no decision-making authority.

After the occurrence of insolvency and the appointment of a provisional insolvency administrator, there is an obligation to liquidate without delay. Delays can give rise to liability for damages (BGH, judgment of March 19, 1981 — IX ZR 54/80). The realization must be carried out publicly (§ 1235 BGB) in order to ensure market transparency and fair pricing.

A waiver of the publicity obligation (Section 1237 BGB) is excluded; it serves to protect the creditor community and the legal certainty of the proceedings. The publication in accordance with Section 1237 of the German Civil Code (BGB) relates exclusively to the essential auction data — in particular the place, time and subject of the auction.
Confidential data and sensitive company information will not be published, but made available exclusively in a secure virtual data room (VDR). Access is only granted to previously verified interested parties after signing a non-disclosure agreement (NDA). As a rule, the debtor (pledger) has already undertaken in the pledge agreement to cooperate in the event of realization and to provide the current documents required to conduct the auction. In accordance with his public appointment (§ 34b GewO), the auctioneer is sworn to secrecy towards third parties and maintains the confidentiality of all non-public information with due care. The frequent assertion that a public auction could impair the value or reputation of the auctioned item is unfounded. The legally prescribed market transparency does not serve to disclose confidential company data, but rather to create equal access conditions and fair, competitive pricing. As a result, it has a value-stabilizing and legally compliant effect.

Open market sales as a risk

What appears attractive for lenders or insolvency administrators in the short term — no external costs, no disclosure of proceedings — is fraught with legal liability. The freehand sale requires the consent of all affected rights holders (Section 1245 BGB) and a specific declaration relating to the individual case. However, this blanket consent in the security agreement is null and void in the event of insolvency. Since company shares do not usually have an objective market price, Section 1245 BGB is practically inapplicable anyway. Any sale on the open market in the event of insolvency violates mandatory law.

M&A processes are not auctions

The term “auction sale” used in M&A jargon does not refer to a legal auction procedure, but rather a contractually organized bidding procedure. Insolvency administrators, investment banks or funds have neither an auctioneer’s license (Section 34b GewO) nor a public appointment. A knockdown with legal effect does not occur there. Only the public auction by a suitable publicly appointed and sworn auctioneer (§ 34b GewO) leads to a legally formative knockdown (§ 156 BGB) — and thus to real finality (endgame situation, no room for renegotiation).

Breaches of law in the realization of pledged company shares. Legal consequences for insolvency administrators, M&A advisors and pledgees.

M&A proceedings or private sales in the context of insolvency are unlawful and fraught with liability: the insolvency administrator exceeds his powers, M&A advisors act without the required auctioneer’s license and public appointment, and pledgees risk rescission or reversal (sections 129 et seq. InsO).

Consequences of liability

Insolvency administrator (Section 60 InsO): Breach of duty in the event of unauthorized realization; obligation to pay damages to the pledgee (e.g. difference or damage caused by delay).
Third parties (M&A consultants, law firms): Liability in tort pursuant to Section 823 (2) BGB in conjunction with Section 1235 BGB or Section 826 BGB if they participate in unauthorized exploitation.
Creditors’ representatives: If they fail to take the necessary protective measures, they may be in breach of their duty to advise or to organize in accordance with Section 280 BGB.

Unauthorized exploitation may constitute a breach of trust (Section 266 StGB) — an official offence that must be prosecuted ex officio once it has been discovered.

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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