Tips for buyers of assets from insolvent companies

October 14, 2008

As well as the headline grabbing collapses and bail outs, a difficult economic climate can offer opportunities to build and expand businesses. 

An astute buyer, blessed with cash in the bank, can find many assets and businesses at bargain prices. Those being sold by insolvent companies often present the best value. However, the acquisition process does not come without its risks.

Set out below our are top ten tips for 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. The buyer would need to show that a proper price was paid.

If in doubt, 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 indeed 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. For example, an administrative receiver is appointed pursuant to powers in a debenture and the buyer will need to ensure, amongst other things, that the debenture was properly executed and registered at Companies House.

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 which 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 in respect of 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 aware of retention of title issues
If the seller carried on business as say a manufacturer or supplier, the assets being sold may be subject to retention of title or other conditional terms. The administrator can only pass on the title which the seller has in such assets. This means that the assets may have to be returned to the supplier, if a valid retention of title claim can be proven.

You should ask the insolvency practitioner to agree to deal with retention of title claims in the first instance. Many clauses are poorly drafted or not supported by proper procedures and the insolvency practitioner will have experience of challenging them.

Consider acquiring such disputed assets, only if you are to be refunded all or part of the purchase price, if a claim is successfully made against you.

6. 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:

• incorporate a new entity in order to ring-fence the acquired assets;

• make sure you have the funds in place to pay the consideration. Deferred payment terms are obviously not popular with insolvent sellers;

• if possible, negotiate a "pre-pack" sale (one negotiated before the insolvency practitioner is appointed). The sale which is sometimes, though not always, made to the previous directors or managers of the insolvent business, 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. Due to the lack of warranties which are likely to be offered, due diligence will be all the more important.

The due diligence team (financial/tax advisers, lawyers, HR, industry specialists etc) should be appointed/in place as soon as possible. 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.

7. One-sided agreements
Generally the terms of the sale agreement will be in favour of the seller. Even the least contentious standard provisions will often not be drafted on a reciprocal basis.

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 be excluding the insolvency practitioner's personnel 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.

8. Consider employee position
Employment due diligence is particularly important. The appointment of an insolvency practitioner will not automatically terminate contracts of employment (save for 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 ("TUPE") 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.

It is extremely unusual to obtain an indemnity from the insolvency practitioner with regard to employee claims, therefore, the purchase price should reflect such risk.

The position on pensions should also be considered. A buyer can either take over an existing scheme, provide a new scheme or negotiate a bulk transfer.

9. Substantial property transactions – section 190 Companies Act 2006
This provision comes into play if a director of the insolvent company (or holding company) is seeking to purchase assets from the insolvency practitioner.
Section 190 of the Companies Act 2006 states that transactions (in respect of a certain minimum value) 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.

10. 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.

There are exemptions (involving the notification of all creditors) but also consider using a different name.

Summary
A reduced price must be set in context with the increased risk taken on. It is important to try and minimise this risk wherever possible. Due diligence is key and an experienced and reactive legal team essential.

Fox Williams LLP is a business law firm based in the City of London. We are dedicated to providing clients with the highest quality of legal service.

Please contact Paul Taylor if you would like to know more about any of the matters mentioned in this article or simply to discuss our particular approach to your legal needs. Paul is a partner in our Corporate department and advises clients on a broad range of business areas, including mergers and acquisitions, joint ventures, private equity, banking and insolvency.
 
Paul Taylor
Email:
ptaylor@foxwilliams.com
Telephone: 0207 614 2512


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