Buyer of a bankrupt business in self-administration not liable for existing obligations

According to Germany’s Federal Court of Justice (BGH), a party purchasing a commercial business going through self-administered bankruptcy is not liable for the existing obligations incurred in the operation of the business (case ref.: II ZR 457/18).

Section 25(1) sentence 1 of the German Commercial Code (HGB) provides that the buyer of a commercial business shall be liable for the obligations of the seller if the business is carried on under the previous name. However, following a recent ruling of the BGH from December 3, 2019, we at the commercial law firm MTR Rechtsanwälte can report that this rule does not apply if the sale took place while the business was going through self-administered bankruptcy.

The defendant in the case in question was a company against whom insolvency proceedings under self-administration had been initiated. During this period of self-administered bankruptcy, the company hired the plaintiff-to-be to carry out electrical installation work. A few weeks later, the company sold its entire business, meanwhile the invoice for the electrical installation work remained unpaid. The plaintiff subsequently demanded the outstanding amount from the new owner of the company.

Despite initially succeeding before the courts in the first two instances, the lawsuit later failed on appeal before the BGH. According to established case-law, Section 25(1) sentence 1 HGB does not apply if the company is sold by the insolvency administrator. Here, the BGH found that this case-law can also be applied to a sale in the context of self-administered bankruptcy. The Karlsruhe judges noted that in both cases, holding the buyer liable for the existing obligations reduces the chances of successfully selling the company at a good price and thus achieving the best possible outcome in terms of disposing of the assets in the interests of all creditors.

The Court went on to state that the application of Section 25(1) sentence 1 HGB would otherwise favor some creditors of the insolvent company. Even though the debtor in insolvency proceedings under self-administration has extensive powers in terms of being able to dispose of the assets that form part of the insolvency estate, their actions must by informed by the interests of all creditors.

The end result of this ruling by the BGH is that it is now considerably easier to sell and carry on an insolvent company.

Lawyers with experience in the field of commercial law can provide counsel.