Auction sales in judicial liquidation: rights and pitfalls for the buyer

Judicial liquidation (liquidation judiciaire) opens a phase that many buyers see as an opportunity: acquiring a building, a business (fonds de commerce) or professional equipment at a price below market value. But between the auction sale of an isolated asset and the takeover of a business under a sale plan (plan de cession), the rules, risks and obligations differ profoundly, particularly as regards the fate of employees. A buyer who confuses the two mechanisms risks inheriting liabilities he had not anticipated, or losing the deal to a higher bidder. This guide describes how assets are realised, clearly distinguishes the auction sale from the sale plan, and sets out the buyer's rights and the precautions to take.

Realisation of assets, the final stage of judicial liquidation

When the court orders the judicial liquidation of a business on the basis of Articles L641-1 et seq. of the French Commercial Code, it finds that recovery is manifestly impossible. The aim is no longer to save the business but to pay the creditors by converting the company's assets into cash. This operation has a technical name: the realisation of assets (réalisation des actifs).

What the realisation of assets covers

The realisation of assets consists in selling everything the company in liquidation owns: buildings, business, equipment, stock, vehicles, patents, receivables. The proceeds of these sales form a fund which is then distributed among the creditors according to their ranking (preferential creditors, secured creditors, unsecured creditors). The statutory priorities governing this distribution are set out in our article on the order and ranking of payment of creditors in judicial liquidation.

Two approaches coexist. The first seeks to preserve an economic activity and jobs by transferring the business as a coherent whole: this is the sale plan. The second sells the assets one by one, or in lots, without regard to the continuity of the business: this is the sale of isolated assets, which often takes the form of an auction sale in judicial liquidation. Understanding this duality is the essential prerequisite for any acquisition of assets in liquidation.

The role of the liquidator and the supervising judge

Two actors steer the realisation of assets. The court-appointed liquidator (liquidateur judiciaire), an officer of the court, represents the collective interest of the creditors and administers the sale. The supervising judge (juge-commissaire), a judge appointed by the court, authorises and oversees the sales.

The buyer therefore never negotiates freely with an ordinary seller. Each sale requires an order of the supervising judge setting its conditions, or a decision of the court in the case of a sale plan. This judicial involvement guarantees transparency, but it also imposes timing and procedural constraints that the buyer must take into account.

Two distinct routes: sale plan and sale of isolated assets

The most frequent, and most costly, confusion is to believe that buying at auction an asset from a liquidated company amounts to taking over that company. It does not.

The sale plan: taking over a going concern

The sale plan, governed by Articles L642-1 et seq. of the French Commercial Code, aims to ensure the continuation of activities capable of being operated independently, of all or part of the jobs, and the discharge of liabilities. The buyer does not acquire an isolated asset: he takes over an organised whole (current contracts, operating equipment, clientele, sometimes leases and licences) intended to continue the business.

The procedure is regulated. Candidates submit written offers to the liquidator which, under Article L642-2, must include the precise description of the assets taken over, the activity and financing forecasts, the price offered, the completion date and, above all, the level and prospects of employment justified by the activity. The court selects the offer that best ensures lasting employment and payment of the creditors, pursuant to Article L642-5. Price is therefore not the decisive criterion: a lower offer that preserves more jobs may prevail. The rules for submitting an offer and the selection criteria applied by the court are detailed in our article on taking over a business before the court.

The sale of isolated assets: buying an asset, not a business

By contrast, the sale of isolated assets falls under Articles L642-18 (immovable property) and L642-19 (movable property) of the French Commercial Code. Here, what is sold is not a going concern but assets detached from any operating logic. This is the natural ground of the auction sale in judicial liquidation.

The buyer of commercial premises, a lot of machine tools or a fleet of vehicles buys the item and nothing more. He takes over neither the clientele, nor the commercial contracts, nor, and this point is crucial, the employment contracts. Price is the central selection criterion, the highest bid prevailing subject to any outbidding (surenchère).

Why this distinction changes everything for the buyer

The fate of employees perfectly illustrates the gap between the two routes. In a sale plan, Article L1224-1 of the French Labour Code applies fully: the employment contracts attached to the business taken over are transferred automatically to the buyer, who becomes the employer of the employees concerned within the limit of the jobs he has undertaken to maintain. The candidate must therefore cost precisely this payroll, the length of service and any employment-related commitments.

In an auction sale of isolated assets, on the other hand, no employment contract is transferred. Dismissals are carried out by the liquidator under the conditions of the French Commercial Code, independently of the sale of the asset. The buyer of a building or of equipment inherits no obligation towards the staff of the liquidated company. This difference explains why the same industrial asset may be traded at radically different prices depending on whether it forms part of a business takeover project or is bought piecemeal.

Take a small joinery business with fewer than twenty employees placed in liquidation. A buyer who presents a sale plan to continue the business will have to take over the employment contracts of the employees assigned to the workshop. Another buyer who simply buys the warehouse and the machines at auction has no employment obligations: the employees do not follow him.

How the auction sale works in practice

The procedure varies according to the nature of the asset sold. The French Commercial Code draws a clear distinction between immovable and movable property.

Sale of immovable property

For buildings, Article L642-18 of the French Commercial Code refers mainly to the rules applicable to the judicial seizure of real property (saisie immobilière). The supervising judge decides which route is taken. He may order:

• a sale by judicial auction, before the enforcement judge (juge de l'exécution), under the rules of judicial seizure of real property;
• a sale by voluntary auction before a notary, also by auction but within a notarial framework;
• a private sale, at the price and on the conditions he determines, where this solution appears more favourable to the creditors.

In auction sales, the supervising judge sets the reserve price and the essential conditions of the sale, in particular the prior advertising. The prospective buyer consults the conditions of sale (cahier des conditions de vente), a key document describing the property, the easements, the registered mortgages and the terms of payment. On the day of the auction, bids are made through a lawyer before the enforcement judge.

Sale of movable property

For movable property, Article L642-19 provides that the supervising judge orders, on the basis of the liquidator's proposals, either a public auction or a private sale. The auction of equipment, stock or vehicles is frequently entrusted to a commissaire de justice (bailiff) or to a voluntary auction house.

These sales are announced by advertising (catalogues, online auction platforms, legal notices). The buyer can generally inspect the lots at a preview. The lot is knocked down to the highest bidder, and payment must be made in cash or within a short period set by the conditions of sale.

Outbidding, a specific risk of real property auctions

In real property auctions, the buyer declared the successful bidder is not the final owner on the day of the sale. Any person may, within the statutory period, lodge an outbid of at least one tenth of the principal price, which triggers a new sale at an increased reserve price. The first successful bidder may then lose the property if he does not bid again. On the scope of the adjudication judgment and how to secure the acquisition against this risk, see our analysis of the adjudication judgment and outbidding.

This mechanism, inherited from the rules on judicial seizure of real property, requires the buyer to treat the adjudication as provisional until the outbidding period has expired. It is prudent not to commit to works or commercial steps on the property before that period has elapsed.

The buyer's rights in an auction sale

Buying an asset in judicial liquidation confers real advantages, provided their limits are understood.

A regulated price and procedural transparency

The sale under the supervising judge's control guarantees a degree of transparency. The reserve price, often below market value, results from a valuation. Prior advertising allows any interested party to come forward, which limits hidden arrangements. The buyer benefits from a court decision on which his title of ownership is based, which is difficult to challenge once final.

An asset cleared of certain charges

For real property, the adjudication clears the registered mortgages: the registered creditors are transferred to the price, and the buyer receives the property free of mortgages once the price has been deposited and distributed. This is one of the main advantages of acquisition by adjudication: the buyer need not fear that a mortgage creditor will later seize the property he has paid for.

Freedom from the company's debts and staff

Unlike the buyer under a sale plan, the buyer of an isolated asset takes over neither the company's liabilities, nor the employment contracts, nor the current commercial contracts. He buys an asset free of any obligation linked to the previous business. This absence of employment and tax risk explains the appeal of the realisation of assets in lots for investors and industry professionals.

Pitfalls to avoid before bidding

The advantages of the auction sale must not conceal concrete risks, often discovered too late.

No warranty and the condition of the asset

Assets are sold as they stand, without warranty against latent defects in the usual sense of ordinary sales. The conditions of sale frequently exclude any warranty by the liquidator as to the extent, floor area or condition of the property. The buyer therefore cannot turn against the seller if he discovers a defect after the adjudication. A careful inspection, and if possible the assistance of a building professional for a building, is essential before bidding.

Occupation and current leases

Premises bought at auction may be occupied. If there is an enforceable commercial or residential lease, the buyer becomes the landlord and must comply with that lease: he cannot evict a tenant whose title is valid. Conversely, an occupier without right or title will have to be removed through court proceedings, at the buyer's expense and risk. Checking the letting situation before bidding avoids buying a property one cannot freely dispose of.

Cash payment and ancillary costs

The adjudication price must generally be paid in cash or within a short period. A buyer who does not have the funds or a firm financing agreement risks resale for default of the successful bidder (folle enchère), at his own cost and risk, with any shortfall in price charged to him. To this are added the costs of sale (fees, registration duties, lawyer's fees for real property auctions), which significantly increase the real cost of the acquisition. A budget that provides only for the reserve price is an incomplete budget.

Confusing an isolated lot with an operating whole

A buyer who buys a workshop's machines at auction sometimes believes he can take over the business. Yet without the business itself, without the clientele, without the administrative authorisations and without the staff, he holds only equipment. If he genuinely wishes to continue a business, the sale plan route is the only appropriate one, with its employment obligations. Choosing the right procedure from the outset determines the viability of the project.

The risk of outbidding and the illusion of a bargain

The buyer of real property must bear in mind that his adjudication remains fragile during the outbidding period. Incurring expenditure or signing contracts relating to the property before that period expires amounts to betting on ownership that has not yet been irrevocably acquired.

Conclusion

The auction sale in judicial liquidation is a real opportunity, but it does not forgive imprecision. The buyer must first identify exactly what he is buying: an isolated asset, cleared of liabilities and staff, or a business taken over under a sale plan, with the transfer of employment contracts required by Article L1224-1 of the French Labour Code. These two routes follow opposite logics, and confusing them exposes the buyer either to unforeseen employment obligations or to the illusion of having taken over a business when he holds only premises and machines.

The position taken in this guide is clear: in the realisation of assets, preparation takes precedence over opportunism. Before any bid, the conditions of sale must be read in full, the condition of the property and its letting situation checked, the financing secured and the real weight of ancillary costs measured. In practice, have the conditions of sale reviewed by a lawyer before placing any bid and, if your project involves continuing a business, obtain written confirmation that the procedure under way is indeed a sale plan and not a mere acquisition of assets in liquidation.

Frequently asked questions

What is the difference between a sale plan and an auction sale in judicial liquidation?

The sale plan, governed by Articles L642-1 et seq. of the French Commercial Code, transfers an organised business with its jobs and part of its current contracts, by decision of the court. The auction sale of isolated assets, provided for in Articles L642-18 and L642-19, transfers detached assets, without taking over the business or the staff. In the first case, the decisive criterion is the preservation of jobs and payment of the creditors; in the second, it is the price.

Does the buyer of an asset at auction take over the employees of the liquidated company?

No. The buyer of an isolated asset sold at auction takes over no employment contract: Article L1224-1 of the French Labour Code does not apply to a sale of assets detached from the business. Dismissals are carried out by the court-appointed liquidator in the course of the liquidation. Employment contracts are transferred only under a sale plan, within the limit of the jobs the buyer has undertaken to maintain.

Is property bought at auction in liquidation free of mortgages?

Yes for real property acquired by adjudication: the sale clears the registered mortgages, the registered creditors being transferred to the price deposited and distributed. The buyer thus receives property free of these securities once the procedure is complete. It nevertheless remains essential to check the conditions of sale, which state the registrations and any charges.

What is the one-tenth outbid after a real property auction?

After a real property auction, any person may, within the statutory period, lodge an outbid of at least one tenth of the principal price, which triggers a new sale at an increased reserve price. The first successful bidder loses the property if he does not bid again and does not win the second sale. Until that period has expired, the adjudication is not final, which calls for caution before incurring expenditure on the property.

Can property be inspected before the auction?

Yes, in most cases. Real property is the subject of organised viewings before the auction, and movable lots of a preview. As assets are sold as they stand, without warranty against latent defects, this inspection is essential: it allows the buyer to assess the actual condition, any occupation and the works to be planned before setting his bidding limit.

Is a lawyer mandatory to buy at auction in judicial liquidation?

For a real property auction before the enforcement judge, yes: bids are made through a lawyer, and the buyer cannot bid alone. For public auctions of movable property, often conducted by a commissaire de justice or a voluntary auction house, a lawyer is not required. In all cases, a review of the conditions of sale and of the legal situation of the asset by a legal professional greatly reduces the risk of a poorly controlled acquisition.

Does the price paid at auction cover all the buyer's costs?

No. The costs of sale are added to the adjudication price: fees, registration and transfer duties, lawyer's fees for real property auctions, advertising costs. These costs can represent a significant share of the total budget. A buyer who provides only for the reserve price may find himself in difficulty at the time of payment, with, for real property, a risk of resale for default of the successful bidder at his own cost.