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Once a company is in Administration, Administrators will look for someone to buy the insolvent business and its assets as soon as possible, either straight away or (if the company has sufficient funds to facilitate it) after a period of trading.
Buying an insolvent business can be a quick win. Assets are often sold cheaply through a ‘fire sale’ and liabilities to creditors of the business remain with the seller.
Sound too good to be true? There are a number of traps that prospective buyers can fall into if they’ve not been made aware of them.
10 important things (this list is not exhaustive) to be aware of before buying an insolvent business are:
1. Buyer Beware
Administrators act as agents of the Seller company. They will accept no personal liability under the contract for sale and will give no warranties about the assets sold. Therefore the usual warranties that a seller might give – as to ownership of assets, encumbrances over assets, quality etc will be excluded.
Conversely the default position adopted by Administrators is that the buyer must give them (and usually also the seller) indemnities against any liabilities that may arise in connection with the assets and business or as a result of the sale. This may include employee liabilities, claims by those who might have title to the assets sold and landlord’s claims, amongst other things.
3. Due Diligence
There may be little time available for the buyer to carry out ‘due diligence’ or the Administrators may not allow it. Any information provided by the Administrators cannot be relied on as there will be no right of recourse if it is incorrect.
4. Employee Liabilities
It is essential to understand the extent of the employee liabilities that will fall on the buyer. The Transfer of Undertaking (Protection of Employment) Regulations 2006 will usually have the effect of transferring employee contracts to the buyer automatically. This also brings with it (depending on the number and location of employees) certain obligations to inform and consult about the transfer of employment contracts and changes to them. Failure to comply can result in an employment tribunal awarding substantial sums by way of compensation.
5. Unpaid Suppliers
The buyer will usually take the risk that stock might belong to unpaid suppliers. Where goods are sold on contractual terms that provide for a supplier to retain title, a supplier may have a right to ask the Administrators to give the goods back. Such claims can often be defeated but valid claims could reduce the value of stock substantially and either cause a problem trading with too little stock or cause a cash flow problem if suppliers have to be paid for stock retained by the Buyer.
6. Lender’s Security
Lenders to the seller company are likely to have charges over assets. These are usually created by a ‘debenture’ which includes fixed and floating charges. Whilst an an Administrator can sell floating charge assets (such as stock) without the agreement of the lender, they cannot sell fixed charge assets (property, plant and machinery, goodwill, intellectual property etc). Even if the assets can be sold, the Administrators should be asked to secure a release of its charge over the assets sold.
7. Property Panic
As distressed sales often conclude very quickly there may not be time to secure a lease with the landlord. The Administrators will offer to give a License to Occupy the business premises. However, the Administration of the tenant, non payment of rent and allowing another company into occupation of the premises are all breaches of the lease. The landlord is not bound to allow the lease to continue even if rent is being paid by the new occupant. The Administration prevents the landlord from forfeiting the lease without the permission of the Administrators or the court but, faced with the prospect of a court application, there may be little incentive for the administrators to refuse consent to forfeiture.
8. Terminated Contracts
Contracts may be terminated on administration. Even if they are not, they may not be assignable and an attempt to assign may cause the contract to breached. A third party to a contract cannot be forced to contract with a new party.
9. Book Debts
Debts due to the seller are usually retained for the benefit of the administration, but may be assigned to the buyer. However debts are rarely collectable in full and may be subject to defences and cross claims as a result of the seller’s breaches. The price paid for debts should reflect this.
10. Intellectual Property
Intellectual Property necessary to run the business may not belong to the seller and licenses to use it may have terminated or may not be transferable.
There are additional practical and financial considerations when purchasing a business out of administration. KSA Group offer some advice on these and the steps to take when buying such a business.