Sale of Business Units in Spanish Insolvency Proceedings: What Does the Buyer Actually Acquire?

A company’s insolvency does not necessarily mean that its underlying business has ceased to be viable. A company may be subject to insolvency proceedings while still retaining a valuable business: a recognised brand, operating premises, ongoing contracts, employees, technology, customers or distribution channels capable of continuing to operate.

Spanish insolvency law allows these two realities to be separated in certain circumstances. Rather than selling the company’s assets individually, the organised set of resources required to continue the business may be transferred to a third party. Spanish insolvency legislation refers to this as a business unit (unidad productiva).

A recent case provides a useful illustration. Liwe Española may not be a familiar name outside the fashion industry, but it is the company behind Inside, the fashion retail chain primarily aimed at younger consumers. Liwe has been subject to insolvency proceedings since early 2026.

On 1 September, Liwe informed the Spanish National Securities Market Commission (CNMV) that a third party had submitted a binding offer to Commercial Court No. 3 of Murcia to acquire its business unit. The proposal seeks to continue the business and provides for the transfer of the employment contracts of 958 employees, representing more than 90% of the workforce. At the date of the announcement, the transaction had not yet received judicial approval and remained subject to the insolvency proceedings.

What makes the case particularly interesting from a legal perspective is the context in which the offer has been made. According to the company, negotiations with the Spanish Tax Agency and its financial creditors —which account for the majority of its insolvency liabilities— had not secured the support required to approve a composition agreement capable of ensuring Liwe’s viability. Faced with the difficulty of preserving the company in its current form, the offer raises a different possibility: allowing the underlying business to continue under the ownership of a third party.

This is one of the central features of the sale of a business unit in insolvency proceedings: an insolvent company and the viable business operating within it do not necessarily have to share the same fate.

Article 200.2 of the Consolidated Text of the Spanish Insolvency Act (Texto Refundido de la Ley Concursal, or “TRLC”) defines a business unit as a set of organised resources used to carry out an essential or ancillary economic activity.

The key word is “organised”. This is not simply the sale of a number of assets as a package, but the transfer of a combination of resources which, taken as a whole, is capable of carrying on an economic activity.

Depending on the nature of the business, the unit may include premises, machinery, inventory, trademarks and other intangible assets, contractual relationships, licences or permits and employees. What matters is not so much the individual nature of each component, but the fact that together they form an organised business capable of continuing to operate.

This distinguishes the transaction from a conventional corporate acquisition.

When an investor acquires the shares of a company, its ownership changes, but the company itself remains the holder of its assets, contracts, receivables and liabilities. In the sale of a business unit, by contrast, the buyer does not necessarily acquire the company itself: it acquires a defined part of its operating business.

The distinction is significant. A buyer may acquire a going concern without becoming the universal successor to the insolvent company in respect of all its assets and liabilities.

This is perhaps the feature that best explains the practical appeal of the mechanism.

As a general rule, Article 224 TRLC provides that the transfer of a business unit does not oblige the purchaser to pay claims left unpaid by the insolvent debtor before the transfer, whether those claims qualify as insolvency claims or as claims against the insolvency estate.

Accordingly, if an insolvent company has outstanding financial, trade or other liabilities, the acquisition of its business unit does not, in itself, make the purchaser liable for those amounts.

However, it would be equally inaccurate to describe the transaction as the acquisition of a business entirely “free of debt”. The general rule is subject to important exceptions.

The purchaser will be liable for obligations it expressly assumes in its offer, for liabilities imposed upon it under other applicable legislation and, most importantly in practice, for certain employment and Social Security liabilities where the transaction constitutes a transfer of undertaking. The general protection against assumption of pre-existing debt also does not apply where the purchaser is a person specially related to the insolvent debtor within the meaning of the TRLC.

The transaction therefore requires a careful distinction between liabilities that remain within the insolvency proceedings and those that will follow the transferred business.

There is also an important tax-specific rule. Article 42.1(c) of the Spanish General Tax Act (Ley General Tributaria) generally provides for joint and several liability in certain circumstances where a person succeeds to the ownership or operation of a business or economic activity in respect of tax liabilities of the previous operator. However, the same provision expressly excludes this form of successor liability where the business or economic activity belongs to an insolvent debtor and is acquired within insolvency proceedings.

This does not amount to a general exemption from any potential tax liability. It does, however, mean that the mere succession to the business activity does not trigger the ordinary successor liability contemplated by Article 42.1(c) of the General Tax Act.

Employment law provides the most significant practical exception to the principle that the purchaser does not assume the insolvent company’s liabilities.

Article 221 TRLC expressly provides that the sale of a business unit constitutes a transfer of undertaking for employment and Social Security purposes. The insolvency court is also responsible for determining whether such a transfer exists and for defining the assets, liabilities and employment relationships forming part of the transferred business unit.

The transaction cannot therefore be structured simply by selecting the most attractive assets while disregarding the employment relationships that are legally integrated into the transferred activity.

As regards pre-existing liabilities, Article 224 TRLC provides that the purchaser is liable for employment and Social Security claims relating to employees of the business unit whose employment contracts transfer to the purchaser. The court may nevertheless order that the purchaser does not assume the portion of pre-transfer wages or severance payments covered by the Spanish Wage Guarantee Fund (Fondo de Garantía Salarial, or FOGASA), within the limits established by law.

This also helps explain the relevance of the Inside case. The fact that the announced offer provides for the retention of more than 90% of the workforce is not merely an additional feature of the transaction. Continuity of the business and continuity of employment relationships are closely connected within the legal framework governing the sale of a business unit.

Acquiring machinery, inventory, a brand or a network of stores may be of little value if the purchaser simultaneously loses the contracts required to operate them.

For this reason, Article 222 TRLC provides that the purchaser of a business unit is subrogated by operation of law into contracts attached to the continued operation of the business, without requiring the consent of the other contracting party. Public-sector contracts are, however, subject to the specific rules governing public procurement.

The purpose of the rule is straightforward: to prevent the transaction from destroying precisely what it is designed to preserve — a functioning business organisation.

Subrogation is not indiscriminate. Under Article 223 TRLC, the purchaser may expressly exclude from its offer non-employment contracts, licences or permits into which it does not wish to be subrogated.

A similar principle applies to administrative licences and authorisations. Where the purchaser continues the activity at the same premises, the TRLC provides for subrogation into those licences and authorisations that are attached to the continued operation of the business and form part of the business unit, without prejudice to any additional requirements arising under the relevant sector-specific legislation.

Defining the transaction perimeter is therefore much more than a formal exercise. A lease, licence or key commercial agreement may be just as important to the viability of the business as the most valuable asset on its balance sheet.

Another distinctive feature of the insolvency regime arises where several purchasers compete for the business.

In a conventional transaction, a seller may generally prioritise price. Insolvency proceedings involve a broader set of interests: satisfaction of creditors, but also preservation of the business and employment where possible.

Article 219 TRLC reflects this approach. In the context of an auction, the court may award the business unit to an offer that is no more than 15% below the highest bid where it considers that the lower offer provides stronger guarantees for the continuity of the company or business unit and the preservation of employment, while also ensuring better and faster satisfaction of creditors’ claims.

Price therefore remains important —the legislation itself imposes a specific limit on the court’s discretion— but it is not necessarily the only relevant factor.

This also explains why an acquisition proposal may include commitments relating to continued operations, employment or a future business plan. These are not necessarily merely reputational or ancillary aspects of the transaction; they may be relevant to the assessment of the offer within the insolvency process itself.

One of the most important decisions in the acquisition of a business unit is determining precisely what is being acquired.

The TRLC requires offers to identify the assets, rights, contracts, licences and authorisations included in the proposed acquisition, together with the price, payment arrangements, guarantees offered and the impact of the transaction on employees.

There is a clear reason for this requirement. A perimeter that is too narrow may exclude elements without which the business cannot realistically continue to operate. A perimeter that is too broad may expose the purchaser to relationships, costs or risks that undermine the attractiveness of the transaction.

Due diligence in a business-unit acquisition therefore differs in focus from conventional M&A. When shares in a company are acquired, a significant part of the exercise involves identifying contingencies that will remain within the target after completion. In the acquisition of a business unit, the analysis shifts towards identifying which elements must necessarily follow the business and which liabilities may transfer to the buyer as a matter of law, as a consequence of the court order or because of commitments made in the purchaser’s own offer.

Particular attention should be paid to the employment relationships affected, essential contracts, licences and permits required to operate, assets subject to security interests and liabilities that may transfer notwithstanding the general rule under Article 224 TRLC.

Encumbered assets may, for example, form part of the business unit, but their transfer is subject to the specific protections afforded under the TRLC to creditors holding specially privileged claims. Depending on how the transaction is structured, the security may remain in place or may be cancelled in accordance with the statutory requirements.

The purpose is therefore not simply to cherry-pick the “good” parts of the company and leave the “bad” parts behind. The challenge is to construct a legally viable transaction perimeter that allows an organised business to continue operating following the transfer.

The Liwe/Inside case provides a clear illustration of why this mechanism exists.

The company is subject to insolvency proceedings and, according to its own announcement, has so far been unable to secure the support of its principal creditors required to approve a composition agreement capable of ensuring its viability. At the same time, a third party has submitted an offer on the basis that the underlying business retains sufficient value to continue operating under a different structure and with the majority of its workforce.

The outcome of that proposal remains uncertain, as the offer is still subject to the insolvency process and to the decisions of the Commercial Court. From a legal perspective, however, the case highlights a fundamental distinction: the fact that a company cannot overcome its insolvency in its existing form does not necessarily mean that the economic activity carried on within it must also disappear.

The sale of a business unit is designed precisely to preserve that value where possible, while balancing the rights of creditors and employees. For the purchaser, it may provide an opportunity to acquire an operating business without becoming the universal successor to all of the insolvent company’s liabilities. For the insolvency estate, it may preserve greater value than the piecemeal disposal of individual assets. And for the business itself, it may offer continuity that the insolvent company is no longer in a position to provide.

This combination of commercial opportunity and legal complexity makes the acquisition of business units particularly sensitive from both an M&A and insolvency-law perspective. At ILIA ETL GLOBAL, we advise companies and investors on acquisitions, restructurings and business transfers, assessing from the outset the appropriate transaction perimeter, the liabilities capable of transferring to the purchaser and the contractual, corporate and insolvency-law implications that may determine the feasibility and execution of the transaction.