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Escrow Arrangements in M&A Transactions

In M&A transactions, parties often agree to deposit a part of the purchase price with a third party, the escrow agent, for a certain period of time in order to offer the purchaser security for any future claims under the guarantees and/or indemnities provided by the seller. To this end, the parties sign an escrow agreement which stipulates under what conditions the escrow agent will pay to a party. If one of the parties goes bankrupt and consequently loses the power to dispose over its assets, this raises many questions concerning the amount placed in escrow.

Courts have dealt with several legal questions in such cases, e.g. can the receiver in bankruptcy (trustee) claim the amount placed in escrow and is the receiver in bankruptcy required to give an instruction to the escrow agent for payment of the balance in the escrow account.

In one particular case, it was ruled that the amount placed in escrow did not form part of the bankrupt party’s assets, which meant that the receiver in question only had a conditional claim on the escrow agent. As a result, the receiver was not able to frustrate the payment to the other party by not providing its cooperation to the joint payment instruction to the escrow agent (which was necessary for release of the escrow amount). The escrow agent was only required to pay out (part of) the escrow amount when the agreed conditions for payment were satisfied and after a joint instruction from the parties, which instruction may not be withheld by the receiver on unreasonable grounds. This concept does not change in a bankruptcy situation.