Buying distressed assets in Germany

Acquiring distressed assets in Germany—whether through informal negotiations, pre-insolvency restructuring, or formal insolvency proceedings—presents both strategic opportunities and complex legal risks. The German legal framework offers buyers multiple pathways to participate in the restructuring or liquidation of distressed businesses, but each route comes with distinct legal consequences, obligations, and risk profiles.

In transactions outside formal procedures, buyers face heightened exposure to clawback actions under §§ 129–146 InsO, especially if the seller is already insolvent or close to insolvency. They may also incur civil or even criminal liability if the transaction is later found to have violated creditors’ rights. Risk mitigation in such cases depends heavily on thorough due diligence, careful structuring, and clear evidence of solvency and market-value consideration at the time of the transaction.

By contrast, acquisitions made within the scope of pre-insolvency tools like the StaRUG or formal insolvency proceedings under the InsO offer significantly greater legal certainty. In particular, asset purchases from an insolvency administrator are generally protected against avoidance, and buyers acquire assets free of liabilities, subject only to narrow exceptions (e.g. employment law under § 613a BGB). Even in self-administration procedures, court and creditor oversight provides a higher degree of reliability, although the buyer must ensure that key approvals are obtained.

There is no legal requirement for a public tender, but insolvency practitioners and courts often expect transparent and competitive sales processes—especially for high-value or contentious transactions—to demonstrate fairness and maximize creditor recovery. While public procurement obligations do not usually apply to private buyers, sales involving public entities or sectors may require additional procedural safeguards.

Ultimately, success in distressed M&A in Germany depends on aligning the timing of the transaction, the legal condition of the seller, and the procedural environment. Buyers who understand the fine distinctions between likelihood of insolvency (§ 18 InsO), illiquidity (§ 17 InsO), and over-indebtedness (§ 19 InsO), and who position themselves accordingly—either by acquiring assets through a StaRUG plan, a court-approved insolvency sale, or a secured pre-pack—can seize commercial opportunities with significantly reduced legal risk. Nonetheless, given the complexity of insolvency law and the potential for post-transaction challenges, professional legal and financial advice remains indispensable in any distressed asset transaction in Germany.

A distressed asset refers to a business, property, or any other type of valuable asset that is owned by a company facing a high likelihood of insolvency or already undergoing insolvency proceedings. These assets may include tangible items such as machinery, real estate, or inventory, as well as intangible assets like contracts, intellectual property, or equity interests. The key feature of a distressed asset is not necessarily a diminished intrinsic value, but rather the financial distress of the owner, which often forces a sale under time pressure or other unfavourable conditions.

Typically, such sales occur in the context of financial restructuring, pre-insolvency workouts, or formal insolvency proceedings, with the seller aiming to raise liquidity quickly, satisfy creditor claims, or facilitate a turnaround. This distressed context can lead to lower transaction prices compared to market value, thereby creating opportunities for buyers. However, these transactions also involve significant legal and commercial risks, such as potential clawback actions (avoidance claims), liability for legacy debts, or invalidity of the purchase agreement if insolvency rules are not properly observed.

From a buyer’s perspective, acquiring distressed assets requires careful planning and due diligence. Understanding the financial condition of the seller, the stage of distress (e.g. imminent insolvency vs. actual insolvency), and the applicable insolvency laws is essential. The legal framework in many jurisdictions distinguishes between transactions carried out during a “likelihood of insolvency” phase and those conducted within formal insolvency proceedings, each carrying different levels of risk and regulatory oversight. As such, while distressed asset acquisitions can present strategic opportunities, they demand thorough legal, financial, and procedural safeguards to manage exposure and ensure legal effectiveness.

A company is considered to be in a likelihood of insolvency (also known as imminent or threatened insolvency) when there are objective indicators suggesting that it will not be able to meet its payment obligations as they fall due in the foreseeable future. This is typically assessed through a forward-looking liquidity forecast covering a defined period—commonly up to 24 months—during which the company's expected cash inflows and available reserves are compared against its projected payment obligations. If the analysis shows that a liquidity shortfall is probable, the company is regarded as being at risk of insolvency.

In contrast, actual insolvency occurs when one or more of the formal insolvency grounds defined under national law are fulfilled. Most legal systems recognize at least the following core grounds:

• Inability to pay debts as they fall due (cash-flow insolvency): The company no longer has sufficient liquid assets to meet a significant portion of its due obligations. This is often assessed over a short period (e.g., three weeks) and may include a formal payment default.
• Over-indebtedness (balance-sheet insolvency): The company’s liabilities exceed its assets, and a positive going concern prognosis is not sustainable. This test is particularly relevant in civil law jurisdictions like Germany and Austria.
• Cessation of payments or illiquidity: In some systems, the mere suspension of payment of debts by the debtor can be grounds for insolvency.

In many jurisdictions, directors have a legal duty to monitor financial distress indicators and must take appropriate action—such as initiating restructuring efforts or filing for insolvency—once the threshold of imminent or actual insolvency is crossed. Failure to act in a timely manner can lead to personal liability or criminal sanctions.

It is also worth noting that the distinction between likelihood and actual insolvency plays a crucial role in determining the applicable legal framework: pre-insolvency tools such as restructuring plans or out-of-court workouts may be available in the former stage, whereas formal insolvency proceedings (e.g., liquidation or judicial reorganization) are triggered by the latter.

In Germany, the acquisition of distressed assets—i.e. assets sold by a company in financial crisis—entails a number of legal risks for the buyer, especially if the seller is already in a state of insolvency or close to it. One of the most significant risks is the potential invalidity or ineffectiveness of the purchase transaction due to violations of insolvency law. If the seller is already insolvent under § 17 (illiquidity) or § 19 InsO (over-indebtedness) at the time of the transaction, and the buyer knew or should have known about this, the transaction may be subject to avoidance (clawback) under §§ 129 ff. InsO. Avoidance actions (Insolvenzanfechtung) allow the insolvency administrator to challenge and unwind certain transactions that occurred before the opening of insolvency proceedings if they are found to disadvantage the general body of creditors.

The most relevant clawback provisions include § 133 InsO (intentional disadvantage of creditors), which allows the administrator to unwind transactions made up to ten years before insolvency if the debtor acted with intent to disadvantage creditors and the buyer had corresponding knowledge. Additionally, § 134 InsO permits the avoidance of gratuitous transactions made within four years, and § 131 InsO targets preferential treatment of individual creditors shortly before the filing. For buyers, this means that even transactions that appeared lawful and were made at market value may be reversed if insolvency proceedings are subsequently opened and statutory prerequisites are met. The result can be the obligation to return the asset or its value to the insolvency estate, often without reimbursement for improvements or payments made.

Another critical risk is the potential for civil or criminal liability, particularly if the buyer is found to have cooperated with management in structuring the transaction to remove assets from the estate or circumvent creditors’ rights. Under certain circumstances, this may be prosecuted as bankruptcy fraud or aiding and abetting insolvency delay (Insolvenzverschleppung) pursuant to §§ 283 ff. StGB (German Criminal Code). Even without criminal intent, buyers may be held liable under general tort principles or restitution law if the transaction is later unwound and creditors suffer loss.

Further, assumption of liabilities may pose another hidden risk. Even if the buyer acquires only individual assets (as opposed to shares or entire businesses), German law may impose successor liability—for example, under § 25 HGB (liability for continuation of a commercial business) or via § 613a BGB (in the context of asset deals involving workforce transfers), particularly if the buyer continues the core operations of the seller. This can result in unexpected obligations to assume employment contracts, tax debts, or pension liabilities, depending on the structure and perception of the transaction.

Finally, buyers must also consider the reputational and procedural risks involved. If the seller enters insolvency shortly after the transaction, the buyer may be drawn into disputes with the insolvency administrator or subject to claims for return or compensation, tying up resources in litigation and undermining transactional certainty.

When acquiring distressed assets in Germany outside of formal insolvency or pre-insolvency proceedings, buyers face elevated legal and commercial risks, particularly concerning clawback actions, liability exposure, and enforceability. However, several strategic and legal measures can help to mitigate these risks without invoking the mechanisms of the Insolvenzordnung (InsO) or the StaRUG.

The most important step is conducting a comprehensive due diligence, especially focused on the financial situation of the seller. This includes reviewing liquidity forecasts, recent payment behavior, existing payment defaults, and any indications of over-indebtedness or illiquidity under §§ 17–19 InsO. A proper analysis of the seller’s payment calendar, liabilities, and ability to meet obligations in the next weeks or months is crucial to determining whether the seller is already in a state of actual insolvency—or at least within the so-called Kritische Phase (critical phase), during which clawback risks begin to intensify.

Beyond liquidity assessment, the buyer should evaluate whether any suspicious transactions or preferential treatments have occurred recently, which could lead to avoidance under §§ 129 ff. InsO. If the seller is already experiencing creditor pressure or enforcement measures, this increases the risk of the transaction later being classified as intentionally or constructively disadvantageous to creditors, especially under § 133 InsO (Vorsätzliche Benachteiligung) or § 131 InsO (kongruente Deckung).

To reduce these risks, buyers should:

Structure the transaction at arm’s length, with clear and transparent documentation of consideration, valuation, and commercial rationale. Market-based pricing and payment in full are essential.

Avoid non-cash transactions or any appearance of preferential treatment or insider dealings. Gratuitous transactions or those involving affiliated parties are particularly vulnerable to challenge under § 134 InsO.

Obtain representations and warranties from the seller regarding its solvency status at the time of the transaction, its payment behavior, and the absence of imminent insolvency or existing filing obligations. While these do not prevent avoidance, they may support recourse against the seller or its directors.

Consider payment modalities carefully. Deferred payment structures or step-in arrangements can increase legal uncertainty. Escrow mechanisms or retention arrangements may offer added protection.

Avoid factual continuation of the seller’s business, especially under the same name or with the same personnel, to reduce the risk of successor liability under § 25 HGB or employment liability under § 613a BGB.

Limit publicity and timing risk, since public knowledge of the seller’s financial crisis—e.g., through press coverage or creditor actions—can serve as proof of the buyer’s knowledge for the purpose of avoidance claims.

In addition to these transactional measures, buyers should also undertake a risk assessment of potential third-party claims, such as tax authorities or social security institutions, which may assert secondary liability or liens over the transferred assets.

Ultimately, while formal restructuring procedures (StaRUG, Insolvenzplan) offer certain safe harbors and legal certainty, a buyer who wishes to stay outside these frameworks must compensate for the absence of court protection by taking rigorous precautions. Legal risks cannot be eliminated entirely in a distressed scenario, but they can be significantly reduced through careful financial analysis, legal structuring, and proactive risk management.

In Germany, buyers of distressed assets can significantly reduce legal risks—especially those related to transaction avoidance, liability, and enforcement—by acquiring assets within the framework of formal pre-insolvency or insolvency procedures governed by the Insolvenzordnung (InsO) or the StaRUG (Stabilisierungs- und Restrukturierungsrahmen für Unternehmen). These procedures provide not only structured legal oversight but also various forms of creditor involvement and judicial supervision, offering a higher degree of legal certainty for the buyer.

If the company is still not yet insolvent but is in a likelihood of insolvency within the meaning of § 18 InsO, it may initiate a preventive restructuring under the StaRUG, provided that it is not yet illiquid (§ 17 InsO) or over-indebted (§ 19 InsO). The StaRUG enables debtors to negotiate a restructuring plan with selected creditor groups and, if necessary, have it confirmed by the court. In this context, asset sales that are embedded in or enabled by the StaRUG plan can benefit from a high degree of legal predictability. The law also allows for stays of enforcement and majority decisions within creditor groups, protecting the transaction against individual challenges. While the StaRUG does not fully shield buyers from avoidance risks under §§ 129 ff. InsO, it provides a legally recognized framework that supports the economic rationale and fairness of the transaction, which may reduce exposure.

Where the company is already insolvent, the safest route is to acquire the asset through a court-supervised insolvency proceeding. In such cases, the buyer typically deals with the insolvency administrator (Insolvenzverwalter) appointed by the court under § 56 InsO. Asset sales made by the administrator are generally immune from clawback actions, as they are executed on behalf of the estate and subject to court oversight. The risk of personal liability or transaction reversal is therefore significantly lower than in pre-insolvency asset deals.

There are multiple procedural frameworks under the InsO through which asset sales can occur:

In regular insolvency proceedings, the insolvency administrator liquidates the debtor’s assets and may sell them via private sale or public auction. Buyers benefit from the administrator’s power to dispose and from the transparency of the court process.

In self-administration proceedings (Eigenverwaltung, §§ 270 ff. InsO), the debtor remains in possession, but acts under the supervision of a court-appointed monitor (Sachwalter). Asset sales may still require creditor approval or court confirmation, but the process enables faster transactions and greater continuity.

In protective shield proceedings (Schutzschirmverfahren, § 270d InsO), the debtor—if not yet insolvent but already in a restructuring context—develops an insolvency plan under court protection. Asset sales that are part of such a plan benefit from strong legal legitimacy and are binding on dissenting creditors once confirmed under § 248 InsO.

Buyers can also participate in so-called pre-pack sales, where the terms of the transaction are pre-negotiated prior to the opening of insolvency proceedings and then rapidly implemented once proceedings commence. While not formally codified, pre-packs are increasingly used in Germany, especially in complex restructuring cases involving international investors.

In all these settings, the acquisition process typically involves a formal bidding procedure, disclosure of relevant financial and legal information by the administrator or debtor-in-possession, and—depending on the type of asset and creditor interest—approval by the creditors’ committee or the insolvency court. Buyers should prepare for limited warranty protection but benefit from the general rule that liabilities do not transfer with the asset, unless expressly agreed.

When a buyer acquires assets from a distressed company within the framework of pre-insolvency or insolvency procedures in Germany, their liability exposure is generally lower than in informal or out-of-court transactions. Nonetheless, certain residual liabilities or statutory obligations may arise, depending on the structure of the transaction, the type of asset acquired, and the applicable legal framework.

In formal insolvency proceedings under the Insolvenzordnung (InsO), asset purchases are usually executed by the insolvency administrator (Insolvenzverwalter) or the debtor in self-administration (Eigenverwaltung) and are considered free of debt unless explicitly agreed otherwise. According to prevailing legal practice, the buyer of an asset from the insolvency estate does not assume the liabilities of the insolvent debtor, including tax debts, trade payables, or labor obligations, unless (a) the transaction constitutes a de facto business continuation, or (b) the buyer contractually agrees to take on specific obligations.

However, exceptions apply in certain cases—particularly where the buyer acquires an operational unit in a way that leads to a business continuation (Betriebsfortführung) or transfer of undertaking. The key legal norms are:

§ 25 HGB (Commercial Code): If a commercial business is sold and continued under the same name, and the seller's liabilities are not expressly excluded, the buyer may be held liable for pre-existing debts. However, this rule does not apply to acquisitions made in insolvency proceedings, as clarified by the Federal Court of Justice (BGH), since the continuity assumption is broken by the role of the insolvency administrator and the liquidation mandate.

§ 613a BGB (Civil Code): In the case of an asset deal involving the transfer of an operational business unit with employees, employment relationships automatically transfer to the buyer, including all associated rights and obligations. This rule applies even in insolvency, although with certain modifications. Specifically, § 613a Abs. 1 Satz 1 BGB remains applicable, but employees may object to the transfer, and dismissals due to restructuring may be allowed under narrower conditions. The buyer must inform the workforce properly under § 613a Abs. 5 BGB, and failure to do so can result in automatic transfer of employment contracts.

Successor liability in public law: Buyers should also be aware of potential public law liabilities, such as liability for unpaid social security contributions, VAT, or environmental cleanup costs. While these are generally not automatically assumed, certain administrative or regulatory rules—especially in highly regulated sectors—may impose obligations on the buyer, for example under tax law (§ 75 AO) or environmental law (e.g. in the case of contaminated sites).

In StaRUG proceedings, the situation is slightly more nuanced. Since StaRUG does not create an insolvency estate or trigger full court control, transactions are still executed by the debtor itself. Therefore, buyer protection depends more heavily on the structure of the plan and the existence of creditor consent and court confirmation. If the transaction is explicitly provided for in a confirmed restructuring plan under §§ 17–27 StaRUG, it generally benefits from legal certainty and limited liability. However, unlike full insolvency proceedings, the buyer may still be exposed to greater residual risks—especially if the transaction is not properly shielded or challenged later.

To further limit liability, buyers should:

Insist on clear documentation of asset separation, especially in the case of complex business units.

Require confirmation from the insolvency administrator or court that no liabilities are transferred and the transaction is free of encumbrances.

Carefully analyze the employment structure and consider whether § 613a BGB applies.

Ensure compliance with information obligations toward employees and authorities.

Consider obtaining indemnities or liability caps in the purchase agreement, even though these may be difficult to enforce against a debtor in crisis.

Under German law, there is no general statutory obligation to conduct a public tender when selling assets in the context of pre-insolvency or insolvency procedures. However, depending on the procedural framework, the nature of the assets, and the role of the parties involved—especially the insolvency administrator (Insolvenzverwalter)—certain principles of transparency, equal treatment of creditors, and maximization of the insolvency estate may lead in practice to tender-like processes, especially in significant or high-value asset sales.

In formal insolvency proceedings under the Insolvenzordnung (InsO), the insolvency administrator has wide discretion under § 80 InsO to manage and realize the debtor’s assets, subject to supervision by the insolvency court and, where applicable, the creditors’ committee (Gläubigerausschuss). There is no explicit legal requirement that asset sales be conducted through a public auction or tender. However, the administrator is bound by fiduciary duties and the overarching goal of achieving the best possible recovery for the creditors. As a result, in practice, administrators will often initiate structured sale processes, which may include:

Invitation to bid procedures for certain asset classes (e.g. machinery, IP, real estate, entire business units),

Negotiated sales with multiple potential buyers to test market interest and pricing,

Or even public auctions, especially for easily marketable or standardized assets.

The choice of method depends on the asset type, market conditions, and strategic considerations. For large or complex transactions, especially in the context of a pre-pack sale, administrators may conduct an informal market survey or engage M&A advisors to ensure transparency and maximize proceeds. In such cases, although there is no legal mandate, a quasi-public tender process may be used to satisfy the expectations of the court and creditors.

In self-administration proceedings (Eigenverwaltung) under §§ 270 ff. InsO, including protective shield procedures (Schutzschirmverfahren), the debtor remains in control of operations but must obtain approval of major transactions—especially the sale of core assets—from the court-appointed monitor (Sachwalter) and often from the creditors’ committee. Again, no tender is required by law, but major asset sales must be justifiable in terms of fairness and creditor benefit. A lack of transparency or an obviously underpriced deal could trigger challenges by creditors, damage the legitimacy of the restructuring plan, or result in court refusal of plan confirmation under § 248 InsO.

In pre-insolvency StaRUG proceedings, the debtor is still acting in its own name and retains full control over its assets, meaning there is no obligation to conduct a tender, and in fact the process is more confidential than insolvency proceedings. However, if a transaction forms part of a court-confirmed restructuring plan and affects creditor interests, the debtor must ensure that the transaction is clearly disclosed, economically justified, and approved by the affected creditor groups. Failure to do so may lead to plan rejection or post-confirmation legal disputes.

Special considerations apply in certain regulated sectors or public law contexts. If the insolvent company is a publicly owned entity or operates under public concession (e.g. municipal utilities, hospitals), additional procurement rules or municipal law obligations may require formal public procurement or approval processes. Similarly, state aid rules under EU law may require open and transparent procedures to avoid unlawful subsidies.

In conclusion, German insolvency law does not impose a mandatory public tender for asset sales in pre-insolvency or insolvency proceedings. Nevertheless, in practice, tender-like processes are often used voluntarily by insolvency administrators or debtors in self-administration to ensure compliance with principles of transparency, to avoid disputes, and to demonstrate that the transaction serves the best interests of the creditors. While not legally required, a transparent and competitive sale process can enhance legal certainty and protect the buyer from subsequent challenges by the court, creditors, or other stakeholders.