The rapid spread of COVID-19 has had an important economic impact on the business market with many businesses facing financial difficulties and, in particular, smaller companies becoming insolvent as a result. This note focuses on the process of buying the business and assets of an insolvent company (IC).
A company is deemed to be insolvent if it is unable to pay its debts and the principal insolvency procedures in England & Wales are administration and liquidation. Liquidation differs to administration in that there is a terminal procedure resulting in the dissolution of the company, however the majority of insolvency procedures involve the disposal of some or all of the IC’s assets to realise funds to pay its creditors.
Initial points for a buyer to consider
- Price: The prospective should make a reasonable offer to purchase the business and assets of an IC. An administrator has a duty to take reasonable steps, including delaying a sale, to obtain the best price for the sale of the IC. Therefore a buyer should decide how far it is prepared to research the circumstances of the IC at that moment in time. If the IC is in a form of receivership, the receiver’s standard of care is to ensure they obtain the best price reasonably obtainable at the time of sale but they do not need to delay a sale. There are a number of factors a buyer should consider when quantifying its offer and a number of these are considered below.
- Time is of the essence: The longer a business is in the hands of an Insolvency Practitioner (IP), the greater the risk of deterioration. The buyer should consider this when making an offer and should also consider reducing the offer as it assumes considerably more risk in an urgent insolvency purchase than it does in a commercial purchase (see below).
- Risk allocation: In a commercial purchase from a solvent company, a buyer bases the purchase price based on a number of assumptions supported by warranties and indemnities in the legal documentation. If the assumptions are incorrect post-completion, the buyer can bring claims against the seller under the terms of the warranties. In an insolvency purchase, insolvency practitioners will often know little about the business (no more than the buyer can find out through its own investigations) and will want to avoid continuing liability – therefore an IP is unlikely to agree to give any warranties or indemnities regarding the business and the assets being sold.
- Personal liability of an IP: IPs are generally able to exclude personal liability, This means that a buyer may be expected to pay the full purchase price with no prospect of bringing a claim against the IP or the IC post-completion. This, coupled with the limited due diligence exercise a buyer may be able to undertake, should be reflected in the agreed purchase price.
Methods by which an IP can sell the Business and Assets of an IC
- Private contract or treaty: This usually occurs once the IP has identified his preferred buyer.
- Auction: The advantage of this mechanism is that, aside from having several prospective buyers bidding against each other, the buyer purchases on the basis of the legal documentation in place (and therefore there should be no negotiation). An auction tends to occur when there are small assets or substantial assets in a wide market.
- Sealed bids or tenders: This is a preferred mechanism for IPs as a potential buyer has no indication of prices offered by competitors (unlike an auction) and therefore the purchase price is often higher than those achievable at an auction sale.
The transaction would normally be structured as a sale of the business and assets of the IC (as opposed to a sale of the shares in the IC) to the buyer. We would suggest legal and tax advice is sought on this point however.
The buyer is responsible for undertaking appropriate due diligence (DD), to the extent it is able in the circumstances. An IP may prepare an information memorandum which contains limited information if circumstances allow, which will help in this regard. Whatever DD information the buyer can review, the better it will be able to calculate the price it is willing to pay for the business and the assets.
A buyer may want its DD investigations to involve the inspection of the assets and contracts in question but an IP is more likely to agree to this only once an offer has been made.
There are a number of steps a prospective buyer should consider as part of its DD and these are highlighted below:
- Evidence and validity of an IP’s appointment: A buyer should request the IP to provide them and their advisors with copies of documents confirming their appointment. It is important for a buyer to verify the validity of an IP’s appointment to avoid any possible challenge by any creditors, directors or members of the IC.
- Asset title: A buyer should verify that the assets (and the business) it is purchasing are owned by the IC, to the extent it is able from title documents (such as the Land Registry, Trade Mark Register, certificates of registration, etc.). The IC and IP are not going to provide warranties confirming ownership, so you will need to find as much independent confirmation of ownership as you can.
- Group companies: Ownership of assets is particularly pertinent when the IC is part of a group of companies and the group’s assets may be owned by a number of subsidiary companies (these may or may not be involved in insolvency proceedings themselves). If any assets have been transferred between group companies, a buyer will also need to check whether the assets owned by the IC have been acquired for full value from the other group company.
- Retention of Title (ROT): Assets to be sold to the IC may be subject to conditional terms. For instance a third party may agree to transfer the physical assets to the IC but the passing of title to those assets is conditional on payment being made by the IC and received by the third party. Those conditional terms are known as ROT provisions. It is therefore possible that a buyer may purchase assets which are not owned by the IC and are subject to ROT claims.
- Security discharge: Certain assets of an IC may have charges over them and therefore a prospective buyer should verify that the holder of the charge (or other interest) has agreed to discharge the security or interest at the time of sale in exchange for receiving any money owing to the holder of the charge.
- Employees: Where there is a sale of a business as a going concern, a prospective buyer will need to consider the impact of TUPE, the legislation which protects the rights of the IC’s employees (if there are any).
- Pensions: A buyer will need to investigate whether there are any pension liabilities and whether they will be transferred.
- Property: Property is often a key asset owned by the IC and which the buyer is seeking to purchase. In an insolvency purchase, a buyer is unlikely to be able to carry out a full investigation of title and the burden is on it to carry out the best investigation possible.
- Intellectual Property Rights (IPR): IPR may be an important asset and again a prospective buyer is advised to investigate as much as possible. If there are any registered IPR, much of such investigation can be done on the ICO website on the Trade Mark and/or Patent registers.
- Books and records: In a business and asset sale the buyer will not have access to the IC’s statutory books but will want access to record books such as customer and order ledgers. As a compromise, the IC often grants the buyer a licence to hold certain records for a certain time frame (12 months from sale or appointment of an IP for example).
- Book debts: These may be an important asset which the buyer seeks to acquire. A buyer needs to consider the likelihood of the recoverable debt and in particular whether a debtor would be able to set off the amount it owes the IC against any loss it may suffered as a result of the IC’s insolvency.
- Tax: Generally, assets sold on a going concern basis are not subject to VAT but we would advise any prospective buyer to seek independent tax advice before proceeding with a purchase.
If you have any questions on the above, please get in touch with our expert team of lawyers.