19 March 2009

Buying The Business Of An Insolvent Company



Even in difficult financial times there are business opportunities and one of these can be buying a business which is insolvent and in the hands of an insolvency practitioner.
UK Corporate/Commercial Law
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Even in difficult financial times there are business opportunities and one of these can be buying a business which is insolvent and in the hands of an insolvency practitioner. This can be an opportunity to acquire market share or valuable assets quickly, and at a keen price. Such an acquisition is, however, more risky than a standard business purchase. Notwithstanding this, armed with an appreciation of the issues specific to such transactions a prospective buyer will be better placed to negotiate the best terms achievable in the context of the insolvent situation.

This article outlines those issues any buyer should be taking into account when negotiating a purchase of an insolvent business.

Balancing the Risk and the Price

Once the decision to sell has been taken, the insolvency practitioner will arrange for the sale to be advertised and may arrange for a sales pack or brochure describing what is to be sold.

Sales brochures often only contain short particulars of the appointment of the insolvency practitioner, a brief factual description of the business and assets for sale and a disclaimer of liability for the accuracy of the information. The onus is firmly on the buyer to check the information contained in the sales brochure.

The insolvency practitioner will not disclose information which may damage the value of the business and therefore information concerning customers of the business may initially be withheld from potential buyers until the insolvency practitioner is happy that the inquiry (usually from a competitor) is made in good faith as part of a genuine due diligence exercise in relation to an offer to buy the business.

If an insolvency practitioner considers a buyer's offer to be serious and made in good faith, he may instruct his staff to admit the buyer to the premises of the insolvent company to inspect its assets. Even at this stage to the buyer may not have access to the books and records of the insolvent company as they may contain market sensitive information which the insolvency practitioner would be reluctant to disclose until the buyer's offer has been unconditionally accepted.

Time is of the essence when the business and assets of an insolvent company are being sold. The longer the business remains in the hands of the insolvency practitioner, the greater the risks of its deterioration - debtors become disinclined to pay and creditors may refuse to extend further credit. Thus, the circumstances in which the business is sold are rather exceptional with the result that, in terms of price, a buyer can expect to get a "good deal". However, the buyer should consider reducing this "good deal" price even further because there is another, very important, difference between an insolvency purchase and a normal commercial purchase: the buyer assumes significantly more risk.

In a normal commercial purchase, the seller does not make a clean break from the business it has sold after completion. The buyer will have based the price on a number of assumptions, such as ownership of the business's assets and its past performance. The buyer can expect the seller to give representations and warranties about this and if any of the assumptions turn out to be incorrect (for example, if the business does not own the assets it is supposed to own) then the buyer can reduce the price by an appropriate amount by making claims under the warranties. The warranties, and the practice of disclosing against the warranties, also encourage the seller to disclose information early rather than letting the buyer find problems afterwards.

An insolvency situation is very different: the insolvency practitioner will not want any continuing liability, either personal or on behalf of the insolvent company, after completion of the sales contract. In particular, insolvency practitioners are likely to refuse to give any sort of comfort in the form of representations and warranties as to matters relating to the business and assets being sold.

Faced with this lack of information and post completion comfort, the buyer may find it difficult to determine the correct price for the business. The price must reflect the lack of certainty over difficulties arising after to completion of the sale. The fact that time may not permit the buyer to conduct as extensive a due diligence exercise as it would like, adds to the buyers difficulty. This means that the risks borne by the buyer should be reflected in the price which will, invariably, represent a significant discount to their value were the sale to take place outside an insolvent situation. Too many buyers do not appreciate, at the time they make their offer, that in these sorts of transactions risks are not evenly shared, and cannot, in many cases, be substantially mitigated.

Title to its assets

A buyer must ensure that the assets it purchases belong to the insolvent company. The insolvency practitioner has no title to sell assets which do not belong to the company because either they are held by the company as trust, are subject to retention of title arrangement or are owned by another company in a group which is not subject to the insolvency proceedings.

It is very important to include in the sale agreement a list of the assets being sold, and to ensure these are all in this possession of seller.

It can often be the case, especially where the insolvent company has carried on business as a manufacturer or supplier of goods or equipment, that the assets sold to a buyer will include assets delivered to the insolvent company on retention of title or other conditional terms (on terms that title in the goods does not pass to the insolvent company until the goods, or possibly all the goods delivered by that supplier to the insolvent company, have been paid for).

As a matter of practice, an insolvency practitioner will, as soon as possible after his appointment, seek to identify and deal with as many retention of title creditors as possible. However, it is always possible that, at the time the business and assets of the insolvent company are sold, not all retention of title creditors will have been dealt with, in which case, the buyer may have to deal with them.

The best position that can sometimes be reached, from a buyer's point of view, is for the insolvency practitioner to agree to deal with retention of title claims in the first instance but to have the right to pass the handling of those claims on to the buyer provided the buyer is refunded that part of the purchase price attributable to the disputed asset. However, in many cases the buyer will be required to take the assets subject to any potential retention of title claims that may exist. There may also be requirements placed on the buyer to give back such assets should a valid retention of title claim be made. The commercial reality is that if such retention of title issues come to light after a sale, the buyer will have to do a deal with the relevant supplier to retain the asset, especially if it is crucial to the ongoing business. Since it is unlikely that the insolvency practitioner will give any warranties in respect of any items which may be subject to retention of title claims, the buyer will have to do as much due diligence as possible (such as reviewing relevant supply contracts) prior to the sale. As with many matters in the sale contract, the additional risks assumed by the buyer will be reflected in the price paid.


Some of the most difficult problems associated with the purchase of a business of insolvent companies stem from the application to the purchase of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE applies equally in relation to the purchase of the business or assets of an insolvent company, if that purchase amounts to a transfer of an undertaking. If TUPE applies contracts of employment of employees in the insolvent undertaking (including all liabilities of the company to the employee) are transferred automatically from seller to buyer.

The employees are also protected against dismissal connected with a TUPE transfer, which will automatically be unfair.

Where the transfer takes place in an insolvency situation, the application of TUPE is varied so that there is more scope for varying terms and calculations of employment after the sale, and in addition the National Insurance fund may pick up some of the liabilities for wages and certain other payments due to employees which would otherwise pass to the buyer.

This is a highly complex area of law and is one where specialist advice would be recommended.

An insolvency practitioner will rarely, if ever, agree to provide an indemnity against the potential liabilities. Indeed, the insolvency practitioner may require buyer to provide an indemnity in favour of the company and himself in respect of any claims subsequently made by employees against either the company and/or the insolvency practitioner.

Once again, it is for the purchase price to reflect the likely level of liabilities and risk to be assumed by the buyer in respect of the employees.

Property and Leases

A substantial part of the fixed assets being sold by the insolvency practitioner may comprise interests in land and buildings. There may not be time to carry out a full investigation of title and once again, the onus is entirely on the buyer and its professional advisers to carry out the best investigation possible within the time available.

Copies of the relevant title deeds may be available from the Land Register. However the buyer will not be able to gain much assistance from the insolvency practitioner and his advisers in filling in the gaps in the supporting information regarding planning, environmental and health and safety matters. This may usefully be supplemented by information gleaned by the buyer following visits to the relevant sites.

Where property is leasehold very often, the relevant lease will make the assignment of that lease from the insolvent company to the buyer conditional upon the landlord's consent being forthcoming. A landlord may seek to use the insolvency of his tenant as an excuse to withhold consent to recover arrears. The landlord may however be willing to agree a new lease with a solvent tenant. In addition the landlord usually has a period of time in which to respond to a request for consent to assign, and this delay can cause timing problems.

If the premises in which the buyer acquires or elects to acquire an interest are essential to the conduct of the business which the buyer is to acquire, then, pending the receipt of any landlord's consent, the buyer will want to be able to use those premises under licence although the licence will be revocable at will by the insolvent company acting through the insolvency practitioner.

Books and records

As the buyer is not acquiring the shares of the insolvent company, the statutory books and records of that company will be excluded from the sale assets. However, the buyer will want to have access to non-statutory books and records of the insolvent company's business, such as, for example, customer and order ledgers, etc. The insolvency practitioner will also often want to have access to those books and records. A compromise must be reached for both the buyer and the insolvency practitioner to have access to and inspect and copy any of the company records. The question of who has possession of the records may depend on whether the purchase is of substantially all of the business and assets or of only a small part of a larger business.


As with a purchase of a business in a solvent situation, generally, assets sold on a going concern basis are not subject to value added tax. The sale documentation will customarily state that all consideration stated as being payable is exclusive of VAT and that the insolvent company and the buyer shall use their best endeavours to obtain relief from VAT.

The agreement will also provide that if the insolvent company and/or the insolvency practitioner becomes obliged to account for VAT on the consideration, then the buyer will, upon production of appropriate VAT invoices, make a payment to the insolvency practitioner of an amount equal to that sum demanded by way of VAT from the insolvent company and/or the insolvency practitioners.

Sale to a connected party

Where the directors of the company are seeking to purchase the business from an insolvency practitioner, Section 190 of the Companies Act 2006 provides that a transaction of "requisite value" between the company and one of its directors or a director of the company's holding company will be voidable unless the arrangement is approved by an ordinary resolution of the company in general meeting and, if the director is a director of the holding company an ordinary resolution of that company also. The section does not apply if the company is in administration or liquidation, but does apply if the company is in receivership.

Proper legal advice is essential in order to allow any buyer of an insolvent business to make a proper assessment of the risks involved and ensure he does not overpay for assets which may turn out not to be owned by the seller, or take on liabilities he did not intend.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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