The Federal Court of Justice (BGH, 22 April 2010, IX ZR 208/08) ruled that an insolvency administrator – when realising movable assets which are subject to a security interest – has no duty to notify the secured creditor a second time before the administrator may sell the assets to a third party for a price better than the offer previously made by the secured creditor.
The decision was made before the background that in German insolvency proceedings it is the administrator who generally realises movable assets even if such assets are subject to a valid security interest. Under § 168 of the German Insolvency Code the administrator must however notify the secured creditor of an envisaged sale, following which the secured creditor has one week to notify the insolvency administrator of any better realisation possibility. A better realisation may include the purchase of the assets by the secured creditor itself for a higher price. As the insolvency administrator may not ignore such notified better way of realising the assets, a secured creditor may be inclined to offer a little more than the price the insolvency administrator notified in order to purchase the assets at a discounted price while retaining a larger part of its claim for satisfaction from the insolvency estate.
In the case brought to the BGH, a secured creditor wanted to do exactly that: The insolvency administrator wanted to sell certain assets to a third party. After the notification of the envisaged sale the secured creditor offered a slightly higher price to the administrator. Following that, the third party increased its offer, which the insolvency administrator accepted without notifying the secured creditor of the improved offer. The creditor claimed the administrator was obliged to notify the improved offer to the secured creditor and sued for damages.
After the Freiburg Regional Court (Landgericht) and the Karlsruhe Higher Regional Court (Oberlandesgericht) had already dismissed the claim, the BGH followed suit. It held that in the interest of speedy realisation the insolvency administrator was only obliged to notify the secured creditor once of the envisaged sale. A third party outbidding the secured creditor and yet purchasing the asset below its value was a risk the creditor took by offering a price below value. The purpose of informing the creditor is not to allow him to enter into a competitive auction to acquire the asset at a minimum price but rather to enable it to avoid a sale below market value.
The decision illustrates the powers of German insolvency administrators: The administrator could have given the creditor another chance but he was not obliged to do so. The same is true with respect to the third party that made the initial offer: the administrator was generally not obliged to give the third party time for an improved offer. The conflicting duties to realise the assets both for the highest possible price as well as in the most timely manner give the administrator significant leeway in his decisions.
Practice guide
- When realising movable assets, the insolvency administrator is not obliged to start a competition between an interested purchaser and the secured creditor. Following the notification of an envisaged sale, secured creditors should therefore carefully consider the option to offer the takeover of the assets below value.
- The powers of German administrators (demonstrated by the decision) make a constructive relationship with the insolvency administrator so important for any party involved. When a creditor communicates with the administrator in a cooperative manner it may help the creditor get the best results while the administrator achieves quick and efficient proceedings.