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Buying An Insolvent Business - Considerations On Both Sides Of The Coin

View profile for Michael Stevens
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Whenever a corporate acquisition takes place there are numerous considerations for the buyer and seller to take into account and mitigating and allocating risk is usually the primary focus.

However, when acquiring a business subject to formal insolvency proceedings, the insolvency practitioner (IP) will essentially take on the role of the seller and the allocation of risk takes on a new focus. This means there are additional implications, both practical and legal, that an IP and buyer need to consider which may differ from a traditional corporate sale. A few of these are discussed below.

Due Diligence

What should the IP consider?

The IP will know very little about the business. Yes, (s)he will have some understanding of the trading history, but not to the extent of being able to answer questions on specific commercial matters such as customers, condition of assets or historical finances. Therefore, the common position for an IP will be to not answer questions and respond with a message of “sold as seen”.

Notwithstanding this, an IP does need to realise assets in order to achieve the best return for creditors. Therefore, some information should be provided where possible in order to keep prospective buyers interested, but ultimately an IP should ensure (s)he is not making representations about the business that later turn out to be false. When acting for an IP we would prepare appropriate caveats and limitations in any documentation to seek to protect the IP’s sale position.

What should the buyer consider?

A buyer should always do due diligence. As with any purchase it is important to know as much as possible about what you are paying for before you part with your funds. However, as noted above, this is a difficulty when dealing with insolvent businesses.

As such, a buyer should look to carry out as much of its own investigation as possible. This would include inspection of stock, property, plant and machinery etc. or having its own accountant analyse the financial books of the business.

The buyer should still engage with professional advisors for due diligence on the business to ensure that it understands the reasons for the business having failed so they can be avoided. Legal advice on prospective liabilities or risks and accounting advice on the financial history may allow the buyer to take on the business but avoid the problems which beset the previous owners.

Warranties

What should the IP consider?

Don’t give them. It is pretty much as simple as that. An IP will not want, nor will be expected, to put their own neck on the line in terms of warranting anything sold to a third party.

In fact, an IP should ensure that the appropriate exclusion clauses are in place within any sale agreement in order to provide the necessary protection for the IP.

What should the buyer consider?

If due diligence is not possible then the seller should warrant against any issues to give the needed comfort, right? Not an IP. Quite often a buyer will feel exposed when dealing with an insolvent business.

However, this is why the price must be correct and a buyer may be able to negotiate a price discount on the basis of it being a “fire sale” style approach by an IP who cannot wait around. As such, a buyer should try and agree a price that adequately reflects the risks it is taking on. This also makes the buyer’s owner commercial due diligence vital. Without warranties the buyer can only rely on its understanding of the core business.

What should the IP consider?

An IP will deal with any employee redundancies in a “terminal” insolvency process and shall liaise with the Redundancy Payments Office. The IP should therefore consider what, if any, employees are to be acquired by the buyer in any business sale.

If employees are to be transferred then the usual seller obligations with regards to “employee liability information” and alike need to be dealt with in the sale agreement to ensure the IP is not exposed to any liability.

What should the buyer consider?

A buyer needs to consider whether or not it is taking on employees. If it is, then the usual issue of due diligence will apply as discussed above with respect to the employees and potential liabilities. A full risk assessment, reviewing existing terms and calculating any redundancy liability, can be carried out by our employment team.

If the buyer is not intending to taking on employees then the provisions of The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) need to be considered in the context of whether the selling business is subject to “relevant insolvency proceedings”.

What Else?

The above are but a tiny few of the considerations that need to be made in a corporate transaction concerning an insolvent business. The standard position of both parties will need to be evaluated in conjunction with the specific aspects of the deal, business, parties and transaction.

If you are involved in such a transaction, whichever side of the coin, then speak to one of our Insolvency Team members who can assist you accordingly.

Our best advice is to seek advice early. Transactions with an insolvency element often move quickly and whether we are acting for the IP or the buyer, the sooner we can be involved in advising, the smoother the process will be.

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