Businesses entering insolvency more often have assets that need to be disposed of to pay back its creditors. How and what assets can be disposed of will depend on the insolvency regime the business has entered into. In the UK corporate insolvency is governed by the Insolvency Act 1986. Liquidation is a termination procedure that results in the dissolution of the business. Administration is a regime designed to rescue the business and the sale of insolvent companies, although it is not always viable. Selling the business whether by asset sale or as a going concern is most likely to occur in administration. This is not the same as acquiring assets from an LPA or fixed charged receiver who will not have the power to sell a business as a going concern, but rather sell the assets over which it has power to sell through their security.
Acquiring a business out of insolvency can be a good commercial opportunity and purchasers must be prepared to act quickly, but there are differences to the acquisition process to be aware of.
What Purchasers must consider:
Achieving the Best Price
There are different ways the insolvency practitioner (IP) can advertise the sale of the target company (Target), whether public or private, but in all cases the IP has duties placed upon it under the Insolvency Rules to justify the terms of the sale (usually to the creditors), and therefore it will be important to the IP to ensure the best possible price is achieved for the Target and any sale is at arms’ length. There will be a negotiation period between purchasers and the IP over the Target. (NB: a receiver does not have this same duty and only needs to ensure they achieve the best price for the asset at the time of the sale).
“Sold as Seen”
The information provided by the IP will have been provided by the Target’s management and the IP gathering the information, however the Target will be sold “as seen”, meaning the burden is on the purchase to satisfy themselves over what they are buying and to verify the information contained in the Target’s sales pack. The sales agreement will not include any warranties over the accuracy of information provided. This is very important for purchasers to consider and to realise what they are buying and to take steps to properly carry out their due diligence into the Target and circumstances.
The IP will look for a swift conclusion to any sale because the longer the Target remains unsold the more likely the assets will deteriorate in value, or will cost money to keep them and they are at risk. This means that the Purchaser is assuming more risk than in a normal commercial transaction, however can also mean the purchaser can negotiate a lower price to buy the assets or Target. The Purchaser needs to be satisfied as to the trade off between price and risk and ensure that what it is buying is worth its value.
Generally, other than a few fundamental warranties if negotiated, the sale of the Target out of insolvency will be without any warranties in the sale agreement. In a normal commercial acquisition, the Buyer remains at some risk through giving warranties and indemnities in the sale agreement which will apply for up to 6 or 12 years after the acquisition completes. However the IP will not have first-hand knowledge of the state of the Target, like sellers in a normal transaction, and will not want that continued risk as it will need to distribute the sale proceeds to the Target’s creditors. It is therefore crucial for the Purchaser to carry out extensive investigations and look at all of the information before committing to purchase the Target.
No Personal Liability of Seller
For the same reason as not giving warranties, the IP will include a provision to exclude personal liability. Whilst this is normal, it means that the Purchaser has no recourse in the event that there is a problem with the Target after completion of the acquisition. The Purchaser in particular should consider the validity of the appointment of the IP to ensure that it does have the power to sell the Target. Again, the added risk can be reflected in the price that the Purchaser agrees to buy the Target for.
Purchasers should check the validity of appointment of the IP
For an administrator appointed by the court, the court order.
For an administrator appointed out of court, any notice of intention to appoint and the notice of appointment, together with additional prescribed documentation if the appointment was made outside court hours.
For an administrative receiver or an LPA or fixed charge receiver, the debenture and the deed of appointment.
Ensuring the Target has title to the assets being bought
The Purchaser should carry out its due diligence carefully and check that the Target actually has title to the assets being sold. In some cases this will be easier to confirm than others. Where there is a group of companies and one Target is being sold, it will be necessary to check the Target owns the relevant assets and not one of the group subsidiaries. It is also necessary to check any charges or security over those assets, such as intra-company security or quasi-securities that may not show up on Companies House like retention of title clauses included in contracts of sale with the Target’s suppliers.
Transactions liable to be set aside
Where a company has entered insolvency, its previous transactions within the past 7 years are reviewable and if there has been any transactions at an undervalue or made to undermine the insolvency process, these transactions are liable to be set aside or void. It is therefore necessary for any Purchaser to check the assets of the Target and ensure where they have been acquired within the past 7 years that they were bought for value. Section 241 of the IA 1986 offers a degree of protection to arms’ length buyers in good faith and for value, but this is only available where the Purchaser does not have notice of the previous transaction in question, therefore it will be necessary to ensure that a proper due-diligence exercise is completed.
Depending on the structure of the sale, there may be numerous post-completion matters to be dealt with in order to formalise the transfer of the Target and /or its assets, such as the assignment of any IP, leases, or supplier contracts. Again, a proper due diligence exercise is strongly advised to check the assets being acquired and the terms of any contracts to check that they are assignable and have not been terminated by virtue of the insolvency as an event of default.
The purchase of an insolvent company or any of its assets can provide a good commercial opportunity and bargain prices, but as a purchaser you must be aware of the added risks in dealing with an IP and buying assets out of insolvency.
These matters can require significant administrative and legal work and should be factored into any budget for acquiring the Target.
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