Insolvency is on the increase which offers excellent opportunities to buyers with cash available to acquire assets or businesses at knock down prices. There are however risks attached to dealing with insolvent companies, so here are our top tips to make sure you get a bargain.
1. Be Prepared
Make sure you are aware of potential acquisition opportunities in your sector. Insolvency Practitioners will provide very limited information on the entities which they are selling and give extremely limited warranty protection, therefore diligence is key. If you have some background knowledge of your potential targets, that can allow you to carry out more detailed diligence in the short acquisition timescale. Insolvency practitioners often approach a range of potential purchasers and buyers who are able to move quickly are at the greatest negotiating advantage. It is also important to ensure that funds are in place to pay whatever consideration is required as deferred payment terms will not be an option for insolvent companies.
2. Challenge to the Deal
If you are aware of difficulties with potential competitors, it may be possible to negotiate a “pre-pack” – a sale negotiated prior to the appointment of an insolvency practitioner allowing to acquire the business without it being offered for public sale.
If a deal is done prior to the appointment of an Insolvency Practitioner, there is a risk that the acquisition can be attacked and shown to be invalid by an subsequently appointed Insolvency Practitioner. Buyers need to show that proper price is paid in order to protect their position and avoid challenge by the Insolvency Practitioner. If there is any doubt wait until an Insolvency Practitioner is appointed.
3. Retention of Title
Depending on the business carried out by the Vendor this can cause difficulties. For example in the retail trade much of the stock being sold may be subject to retention of title clauses. Any administrator is only able to pass on the title held by the seller and once the appointment of an insolvency practitioner is made public, suppliers of goods will take quick action to recover their property. The Insolvency Practitioner should be asked to deal with claims and to refund part of the price if any are upheld. Depending on the price paid, this could be troublesome. The retention of title may in certain cases amount to a sum greater than the consideration paid. Diligence is key in order to ascertain the level of risk in this area.
4. Third Party Consents
Often contracts with landlords and suppliers have automatic termination clauses which mean that contracts are brought to an end automatically in the event of insolvency. If the contracts are vital to the business being acquired then third parties should be asked for their consent to continue the contracts despite the insolvency. If that cannot be obtained prior to the sale and due to either time constraints or the insolvency practitioners unwillingness us to allow contact with the relevant parties then a lower price should be negotiated to reflect the risk.
5. Employee Issues
The appointment of an Insolvency Practitioner does not automatically terminate contracts of employment but it is normally the case that he will dismiss some or all of the employees in an effort to attract a buyer for the assets. There is always the possibility that the Transfer of Undertaking (Protection of Employment) Regulations (“TUPE”) may apply in relation to any transaction and if this is the case then contracts of employment would automatically transfer to the buyer of any assets without any change to their terms leaving him open to claims by employees. Unsurprisingly insolvency practitioners will not give indemnities in relation to employee claims and the price payable should therefore reflect this risk.
6. Charges
Searches should be carried out against the Seller to ensure that releases of all charges to which the assets being sold are subject are obtained. Whilst an Insolvency Practitioner can assist in this process, it will be necessary to liaise with the Charge holders to ensure proper release.
7. Appointment of Insolvency Practitioner
Once you have completed diligence and decided to proceed, you should check that the appointment of the Insolvency Practitioner is in order and that he is able to deal with the assets of the company from which you are purchasing. An invalid appointment would invalidate any sale.
8. Beware Unbalanced Agreements
When the first draft of any agreement is produced by the Insolvency Practitioner it will be extremely Seller friendly. The Insolvency Practitioner does not give warranties and there will be numerous provisions in the agreement excluding any liability on the part of the Insolvency Practitioner. Rather than wasting time and effort on attempting to increase protection for the Purchaser time is better spent on negotiating price or other commercial points in the agreement.
9. Transacting with Directors
If one of the Directors of the insolvent company wishes to purchase assets from the Insolvency Practitioner then any such transaction is voidable unless that arrangement is first approved by the Seller’s shareholders. This process is much simpler if the relevant director resigns prior to any Insolvency Practitioner being appointed and this should be borne in mind.
Directors are also restricted by rules preventing phoenix trading, from starting a new company with the same or similar name to their previous insolvent enterprise. This is to avoid them exploiting the goodwill of the old company whilst avoiding its debts. This restriction lasts for 5 years following the insolvency.
When buying from an Insolvency Practitioner it is very often the case that diligence is conducted in a very short time frame and the price can be based on an understanding of ownership of assets which in fact turns out to be incorrect. As much as possible should be done to check title to assets and to negotiate down the price to reflect the risk that what you see may not necessarily be what you get!