Can former owners really buy a business from a bankruptcy estate and continue operating it?

“Can former owners really buy a business from a bankruptcy estate and continue operating it?”

That question often comes up, both from former owners and from creditors. The short answer is yes, if it is done correctly!

Why?

It is often a very good way to enable distributions to creditors, avoid destruction of value, and save both the business and jobs.

However, it requires an orderly sales process in which other potential interested parties are informed about the business and given the opportunity to participate in a bidding process. Furthermore, affected creditors (often a bank with security) and the supervisory authority must be given the opportunity to comment before a bid is accepted.

The bankruptcy trustee’s objective is to achieve as high a purchase price as possible. If the former owners submit the highest bid, there is rarely any reason not to sell to the highest bidder, and the same of course applies if another interested party submits the highest bid. That said, there may of course be reasons to choose not to accept the highest bid, regardless of who submitted it. For example, when the bankruptcy estate and a prospective buyer cannot agree on the contractual terms (time of payment or completion, allocation of liability, etc.).

In practice, transfers to entirely new owners, former owners, or a combination of both new and former owners are common. The business can continue in some form; this is often referred to as “restructuring through bankruptcy”.

It remains to be seen whether there will be new regulation regarding the possibilities for so-called pre-pack, as proposed by the European Commission. This would mean a statutory possibility, with the court’s approval, to enter into an agreement for a business transfer already before a bankruptcy decision, which is then completed by the bankruptcy estate.

Peter Eriksson
Attorney-at-Law and Partner
[email protected]