This article was originally written for and featured in Fresh Business Thinking.
It’s a sad fact of life that as some businesses are on the rise financially, others will be treading a downward path. Inevitably some will fail and while it may seem harsh, all that can be done is to try and make the best of a bad situation. That could mean someone buying the failed business with a view to keeping on the staff and expanding their own operation, or it could simply lead to the assets of the failed firm being bought inexpensively. Bad for the creditors, but good for the buyer and possibly for the staff they employ.
However, the acquisition process does not come without its risks.Here then, are tips for would-be buyers.
1. Timing is key
When a company is trading normally, decisions are taken by its directors. When a liquidation, administration or administrative receivership order has been passed, decisions will be taken by a licensed insolvency practitioner. There will be a period when the company is in financial difficulties but the directors are either ignoring the problem or trying to trade their way back to financial health. If a buyer acquires assets during this period, there is a risk that the acquisition could be attacked by a subsequently appointed practitioner. Buyers should insist that an insolvency practitioner is appointed as an acquisition from them is extremely difficult to challenge.
2. Check the validity and extent of the appointment of any insolvency practitioner
If you are acquiring assets from an insolvency practitioner, you should satisfy yourself that their appointment is valid. The requirements vary according to the different types of insolvency procedure. Also check which entities are selling the assets. Insolvency practitioners may be appointed in respect of some, but not all, of the subsidiary companies of an insolvent parent company.
3. Check which third party consents are required
Increasingly, contracts with key customers, suppliers and/or landlords will have an automatic termination clause. These allow such third parties to bring contracts to an end, in the event of insolvency. If contracts are key to the business/assets you are acquiring, the buyer should consider approaching third parties for their approval, prior to the transfer. If approval cannot be obtained, the price should be reduced to reflect the increased risk the buyer is taking on.
4. The bank’s position
In addition, carry out a search against the seller to establish who has registered security over the company’s assets. Releases should be obtained over any charges to which the sale may be subject. The insolvency practitioner will not usually have the authority to provide such a release, this must come direct from the charge-holder(s).
5. Be prepared
The insolvency practitioner may be approaching a range of interested parties. A buyer who can move quickly, will be at a great commercial advantage. This means that you should incorporate a new entity in order to ring-fence the acquired assets; make sure you have the funds in place to pay; if possible, negotiate a “pre-pack” sale (one negotiated before the insolvency practitioner is appointed). The sale is sometimes, though not always, made to the previous directors or managers of the insolvent business, and is then rapidly executed without the business being offered on the open market; and be prepared to carry out an extensive but accelerated due diligence exercise. The onus is very much on the buyer to gather as much information as possible in order to flesh out the marketing information given by the insolvency practitioner.
6. One-sided agreements
Generally the terms of the sale agreement will favour the seller. It is very much buyer beware and the insolvency practitioner will not give the warranties which a solvent seller would. In fact a big part of the agreement will exclude the insolvency practitioner’s personal liability. Buyers should be aware of this and not waste effort on non-negotiable terms. Instead focus on getting the best possible price or other key commercial objectives.
7. Consider employee position
Employment due diligence is particularly important. The appointment of an insolvency practitioner will not automatically terminate contracts of employment (except where there is a compulsory liquidation). However, the insolvency practitioner will often dismiss some of the workforce, on or shortly after appointment, to make the business more attractive to a potential buyer or more commercially viable. An administrative receiver will have a 14 day “window” in which to decide whether to adopt the contracts of employment. The Transfer of Undertakings (Protection of Employment) Regulations 2006 may apply in relation to the sale of assets of the insolvent company, if the sale amounts to a transfer of a ‘qualifying business unit’. This will be important as TUPE provides, amongst other things, for the contracts of employment to transfer to the buyer without variation; protection for employees against dismissal connected with the transfer; and also sets out duties on the buyer to inform, and possibly consult, with the trade unions or elected employee representatives. The position on pensions should also be considered.
8. Substantial property transactions – section 190 Companies Act 2006
This provision comes into play if a director of the insolvent company is seeking to purchase assets from the insolvency practitioner. Section 190 of the Companies Act 2006 states that transactions will be voidable, unless the arrangement has been first approved by ordinary resolution of the sellers’ shareholders. Consider the timing and structuring of the buyer’s board of directors.
9. Section 216 Insolvency Act 1986 – ‘phoenix trading’
Section 216 of the Insolvency Act 1986 sets out restrictions on the further use of the failed company’s name or trading name. This is to prevent so called phoenix trading in which the directors of a failed enterprise start a new company with the same, or a similar name, to exploit the goodwill of the previous company, whilst escaping liability for the debts. People who were directors, or shadow directors, of the company in the twelve months prior to the insolvency, should not act as directors, or be otherwise involved in the business of a company with the same or the similar name for five years following the insolvency.