Although any agreement concerning the acquisition of an insolvent company's business will be similar to an agreement with a solvent company, there are certain critical differences.
Introduction
Most acquirers will insist on acquiring the business from a duly appointed insolvency practitioner and not the company itself. This is because the law (a) affords certain protections to a third party buyer acquiring from an insolvency practitioner and (b) legal redress is allowed against a buyer who has acquired assets from a potentially insolvent company directly.
Traditionally, the majority of "insolvent sales" have been by an administrative receiver appointed by a qualifying security holder. Recent changes in UK insolvency law means that there will now be more sales by administrators (appointed by the Court or a security holder) as well as sales by liquidators.
The outline advice below refers to sales by administrative receivers and different factors/advice is needed if the sale from administration or liquidation.
A company's administrative receivers are appointed by the holder of a debenture granted by that company and they owe a duty to the debenture-holder to maximise the realisation of the assets of the company. The receivers will want to show that they have maximised the realisation of the assets and, in particular, they will want to pay to the debenture-holder the money which is realised from the receivership as soon as possible.
On an acquisition from a solvent company you would expect the seller to give warranties, which would give the buyer a legal remedy if the business and assets turned out not to be as described. When dealing with an insolvent company no warranties, or very limited warranties, will be given by the company or its administrative receivers in respect of the business and the assets to be transferred. Any implied warranties as to the assets, will also be excluded. The administrative receivers will also attempt to pass liabilities relating to the assets (for instance, liabilities owed to the owners of assets subject to hire purchase agreements) and the business to the Buyer. Furthermore, should the Buyer have a claim against the company arising out of the sale it is likely to be of little value as the claim will be against an insolvent company and will be unsecured.
Title to assets
The company's administrative receivers will not be prepared to warrant that the company has good title to the assets to be sold to the Buyer. Buyer beware holds true as:
"Where goods are sold by a person who is not their true owner, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had".
The Buyer must therefore appreciate that the company may not have good title to any of the assets to be sold to it by the administrative receivers. The agreement will undoubtedly state that the administrative receivers sell only "such right, title and interest as the company has" in the assets being sold. The administrative receivers' personal liability will also specifically be excluded in the agreement.
Due Diligence is Key
To reduce the risk of not acquiring good title to the assets to be sold to the buyer, it is essential that the buyer carries out as much investigation into the company's business and assets as possible. A buyer should consider whether title to the company's stock has been retained by suppliers. Also whether any of the company's tangible assets are subject to hire purchase or lease agreements, borrowed from third parties or subject to liens.
In the case of assets subject to hire purchase agreements it is fairly common that the hire purchase agreements will be terminable by the hire purchase company upon the appointment of administrative receivers and it is therefore necessary to enter into separate negotiations with the hire purchase company to take effective possession of the hire purchase assets. This also applies to the company's computer software as this is usually licensed by third parties and the licences will often terminate upon the appointment of administrative receivers.
They buyer would be well advised to seek to interview senior personnel of the company. The schedule of assets supplied by the administrative receivers should be thoroughly checked and note if any assets are missing. If assets are situated at any third party's premises, the buyer should seek to establish whether or not that third party claims any rights or a lien over the asset. The assets should also be checked to see if they have labels or plates on them indicating that they are owned by a third party. It is important to establish which assets are to be excluded from the sale and whether any of these excluded assets are located at the company's premises.
It may be possible to negotiate with administrative receivers so that the whole risk of any defects in title (for example, retention of title claims) does not fall on the buyer. In practice this is done by agreeing:
- a limited time within which the buyer must raise any claims (for example, three or six months); and
- that if a claim is successful, the administrative receivers will pay back an appropriate part of the purchase price (for example, in relation to stock, the proportion of book value paid). This would leave the buyer to either return the goods or, if they have been used or sold, to pay the balance of the supplier's claim (usually, for the invoice price).
The administrative receiver will then assess their eventual net position compared with any other offers received and may agree accordingly.
Contracts
In general, the company will not have the legal right to assign any contracts to a buyer. If the buyer wishes to continue with any contracts (with suppliers or customers), they will normally need the express consent of the other party to do so.
Leasehold premises
If the company's premises are leasehold, it will be the buyer's responsibility to obtain all necessary consents and licences to the assignment of any interest in the premises and their occupation of the premises. It will be a term of the sale and purchase agreement that upon completion of the sale, the company's obligations in respect of the premises will cease and the buyer will also be asked to indemnify the company and its administrative receivers against any liability arising from its occupation of the premises without the consent of the landlord.
Employees
The single largest potential liability taken on in purchases from insolvent companies is usually in relation to employees.
If the purchase amounts to the sale of a business as a going concern, by statute all contracts of employment of employees of the company engaged in that business are automatically transferred to the buyer (see transfer of employees above) i.e. TUPE applies notwithstanding the insolvent status. Also, if employees have been dismissed shortly before the transfer and "in connection" with it, liability for any claims may be held to have passed to the buyer.
It is therefore vitally important to investigate the position in relation to employees and any recent dismissals, and to frame the offer, and any sale and purchase agreement, correctly so as to minimise the buyer's risk.
Validity of appointment
As well as investigating the company's business and assets, the validity of the administrative receivers' appointment should also be investigated to establish whether the administrative receivers actually have the necessary power to deal with the company's business and assets.
VAT
If purchasing the Company's business as a going concern, the sale will not attract Value Added Tax.
Release of charges
Finally, upon completion of the sale the buyer needs to ensure that they have either a deed of release from the debenture holder under whose charge the administrative receivers have been appointed or an undertaking from the debenture holder or administrative receivers that such a deed of release will be produced and from any other charge over the assets.