Encumbrances are often less problematic than they appear. Realising assets in bankruptcy extinguishes all security rights, subject to narrow exceptions, so the buyer generally does not take over old security interests on the title sheet. The real risks lie elsewhere: the administrator sells without warranties of physical condition and sale terms usually exclude defect liability; bids are commonly binding; and a co-owner’s pre-emption right may overtake a winning bid for a share. Due diligence should therefore precede the bid.
Property from bankruptcy estates attracts buyers with its price but deters them with title sheets full of security interests and notes. The property’s physical condition must also be checked before buying. The law governs the extinction of encumbrances.
What happens to encumbrances?
Act No. 7/2005 Z. z. on Bankruptcy and Restructuring is unexpectedly generous regarding registered encumbrances:
Unofficial English translation:
Realisation of assets extinguishes all security rights except a security interest created by the administrator after bankruptcy was declared under a binding instruction from the competent body, and a security right over a third party’s assets ranking ahead of the security right securing the bankrupt’s obligation.
Bank security interests and enforcement security interests over the bankrupt’s assets therefore expire by operation of law upon realisation; their removal from the title sheet is an administrative step that still needs completing. The buyer also acquires ownership of an asset included in the inventory even if the bankrupt was not its owner, provided the buyer neither knew nor should have known that (Section 93(3)). This is fundamentally different from buying from an owner whose property is subject to enforcement and who is generally prohibited from selling. We explain the distinction in selling property subject to enforcement.
Where are the real risks?
The administrator realises assets through a public tender, auction, bidding procedure or another suitable method (Section 92(1)), setting the terms themselves. In practice, a bid is commonly binding and withdrawal may forfeit the deposit, inspection opportunities are limited, and sale terms usually exclude liability for physical defects. The law deals with registered encumbrances, not a damp cellar, an unauthorised extension or a non-paying tenant inside.
Defect claims after purchase are therefore substantially harder than in an ordinary sale. We explain what protection a condition clause does and does not provide in buying “as is”. Due diligence before bidding must replace what an agreement addresses in a normal purchase.
Take care when buying a co-ownership share
The administrator is not bound by contractual pre-emption rights. But where a statutory pre-emption right applies, typically other co-owners’ rights on a share sale, the administrator must offer the asset to the entitled person in writing. The administrator ceases to be bound only if the right is not exercised within sixty days of delivery of the offer (Section 93(1)). A winning bid for a share may therefore end with a co-owner buying it. We explain the mechanism in co-owners’ pre-emption rights.
How to prepare before bidding
Read the title sheet and establish which encumbrances will expire upon realisation and which will not. Read the sale terms: whether the bid is binding, the deposit requirements and what happens if you are unsuccessful. Inspect the property and check occupancy arrangements. Structure payment so that funds and ownership transfer together. If you are also a creditor of the bankrupt, consider your own claims; see filing a claim in bankruptcy.
How we can help
Before you bid, we perform property legal due diligence, including the sale terms and which encumbrances will remain after realisation. Our property purchase service covers the purchase from bid to registration, with payment secured through attorney escrow of the purchase price.
If you are considering a bid, contact us before submitting it: you cannot simply take back a binding bid.
This answer provides general information on the law as at 5 September 2026. It does not constitute legal services or replace an assessment of an individual case. The details of your situation may differ. Book a consultation to discuss them.
