Buying an Insolvent Business out of a Formal Insolvency Process
28 Key Things to Consider When Buying Back an Insolvent Business, by Commercial and Insolvency Solicitor, Iain MacDonald
In this article, one of our Consultant Solicitors, Commercial and Insolvency Solicitor, Iain MacDonald, takes an in depth look into the key things that need to be considered when it comes to buying an insolvent business out of a formal insolvency process. He lists 28 of them and starts off by asking the question: “why would anyone want to buy back an insolvent business?” The reality is that many people do, but as Iain suggests, a good Insolvency Solicitor, with commercial as well as legal skills, is needed for the right help and advice along the way.
Buying Back an Insolvent Business
Hopefully, you have stumbled across this article prior to making any final decision as to a formal insolvency. I say that because if you have, then you may have that most precious of commodities, you remain in control, albeit of a rapidly deteriorating situation. It may not feel like ‘control’ but you are still driving a crashing vehicle. If so, please contact us or call us on 0121 200 7040 us immediately. We can almost certainly improve your position now.
Why on earth would you buy back an insolvent business? Good question.
- Typically, any Buyer will be the Director and possibly a Shareholder of the insolvent Company (OldCo), which is being purchased.
- OldCo is insolvent/distressed and could already be in Administration or Liquidation, or another formal insolvency regime.
- An Insolvency Practitioner will be required to take control of OldCo and they either already are or will be offering you terms to purchase OldCo (or its assets).
28 Key Things to Consider When Buying Back an Insolvent Company
Firstly, The Easy Part
As any Insolvency Solicitor will tell you, this is not a normal sale and purchase. How does it differ? A non-exhaustive list may assist:-
- There are no warranties offered by the Vendor. This is non-negotiable (usually) so do not waste time on this. Negotiate for a better deal where you can – we know where the wriggle room is.
- The Insolvency Practitioner as Vendor will provide absolutely no warranties but also will go further and exclude personal liability. Be sure of what precisely you are buying. Any post purchase claims that you might wish to pursue vests against a bust business. You are likely to have no practical recourse against an insolvent entity let us be very clear on that.
- The Buyer must perform its own Due Diligence. Often this is unnecessary because the Buyer is the Director/Shareholder of OldCo. In any event the price payable will often be significantly less than market value, to reflect the absence of warranties and the insolvency.
Getting us involved at the beginning of the process is key. We can likely reduce the price that you pay.
- What About the Employees? This is tricky, but the rule of thumb is that a going concern sale (i.e. a sale of a business as a going concern) will mean that the Buyer inherits all of the employees and their potential and actual accrued claims against OldCo as their employer.
- A Buyer must consult with the duly elected employees’ representatives or recognised trade unions regarding the purchase. Failure to do so places the Buyer in danger of having a financial award made against it.
- You will be buying subject to these pesky things. In essence, this refers to the position whereby another party (e.g. a bank or a supplier) has an interest in an asset ahead of you. Such interests include a mortgage/charge or a retention of title (‘RoT’) claim over assets (usually, stock) or a hire purchase agreement.
- It is vital that these are examined and suitable releases/transfers obtained prior to or at purchase insofar as this can be achieved. Sometimes the solution lies elsewhere. It is frequently the case that a buyer will purchase assets subject to some encumbrances.
- It is often the case that these encumbrances can be reduced in impact. That could, for example, involve RoT stock being purchased from its owner for a very favourable price. Often a deal is struck at a mid-point communication is key here.
- It is not usually easy to acquire leasehold property prior to a purchase. Therefore, a Licence to Occupy the trading premises is given by either the Administrator and/or the Landlord. Before you do this, engage with the Landlord and flush out their attitude to your proposal. Without the Landlord on board you have no premises.
- Administrators now have to pick up the costs of their occupying and/or using the premises. Therefore if a company enters into Administration it is a good idea to plan ahead so that the rent is paid up to date to the point of Administration in order for the Administrators and/or NewCo benefit from a ‘rent free’ period during this time.
Making it Pay
- We make no apologies for talking about the folding stuff. This is where you can turn the business from an unsuccessful one into a roaring success.
- Assets: Who owns them and what are the encumbrances? Get releases where available. What are they? Am I buying what I need? What am I buying?
- Contracts: Ensure that these will be valid and therefore valuable after purchase. Ensure that they can be novated or the benefit transferred to NewCo.
- Customers: What is their attitude? Will they exist post purchase?
- Deal: is it bad? If so, walk away. Do not get emotionally involved.
- Debts: Offer to help to collect the debts of OldCo. This will require time and effort and perhaps rectification of works but should pay insofar as:
a. It preserves trading relationships; and
b. You can negotiate for a percentage of recoveries from the Insolvency Practitioner, to be paid to NewCo.
- Employees: Check how many there are and what their liabilities are e.g. pensions and any outstanding employment claims. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) are not your friend. Consider leaving these behind if you can (see below). The best way to do this is a purchase from a Liquidator.
- Failure: Why did this happen and who was responsible. Why will this not happen again? Think hard on this. Then think more.
- Finance: This is a complex area but without it there is usually no business. Some may find it hard to believe that in the world in which we live some of these people offering finance to NewCo are actually not a good fit for you and may eat you rather than feed you. Perhaps we can change the profile of that risk for you? We know the insolvency and ABL market. We know the good guys who will genuinely try and work with you.
- IPR: These are the ‘intellectual property rights’. They could be rights to use IT or a trademark by way of example only. Can they be transferred, and do you own them?
- Legal Wrangles: Ensure compliance with:
a. Section 216 Insolvency Act 1986 – you may need to go through one of three processes if you wish to re-use the OldCo name if you are previously connected to OldCo. Failure here is punished severely. It is a Criminal offence to breach section 216 and can have serious financial consequences for the Directors and Managers of OldCo.
b. Substantial Property Transactions – section 190 Companies Act 2006. Most connected Purchasers require approval by ordinary resolution of the Sellers’ Shareholders. Failure can be catastrophic.
- Personal Guarantees: Are you giving these? Really? Why? Have you already given them?
- Price: The sooner you call us the cheaper the purchase may be for you. Late on in a procedure we can achieve less. If we are involved very early on i.e. before any Insolvency appointment is made then the story may have (we put it no higher than that) a very happy ending.
- Procedure: Administration vs Liquidation. Few consider the latter route but it is worth considering on occasion because it can reduce purchase costs and leave behind the TUPE liabilities. There are also VAT implications, which must be considered.
- Property: Can you ensure that the Lease will be assigned? Seek agreement from the landlord and negotiate a rent reduction if available.
- Speed: The Administrator or Liquidator will be advertising nationally, and you may need to be able to beat competitors to the drop. Points to consider include:
a. Have cash available;
b. Negotiate purchase payment over time – you may need to offer security in respect of deferred payments;
c. Have a SPV (Special Purpose Vehicle) ready and waiting. A SPV has nothing to do with Captain Scarlett. It is a standalone entity designed to purchase OldCo/its assets and if necessary sink alone, without causing collateral damage.
d. If OldCo is you then use a pre-pack procedure if you can. These have a bad name but they are usually clean and straightforward.
- Suppliers: You will need to pay some perhaps in order to maintain supply. Others you can fold into the insolvency and lose the debt. Caution – some may be secured or personally guaranteed.
- Tax: This area is frequently overlooked for reasons, which do not baffle us, most are too intimidated to approach it. There are tax efficient mechanisms to invoke. These can benefit both the Liquidator/Administrator and the Buyer. Free money is sometimes available but only to those who know how to ask
Contact our Insolvency Solicitors for Expert Help and Advice
In essence, when the bad times roll, there is an opportunity for the brave and the educated. If they are rolling, then contact us or call us on 0121 200 7040 for a FREE initial discussion. We are specialist insolvency solicitors and the Director’s friend and not many in our business can honestly say that.
Many Lawyers do not have the commercial skills to do anything other than the legal mechanics of a rescue. Plucking you out of the creek and placing you alone on dry land is not the ideal way forward.
About the Author of This Blog
Iain MacDonald is a Commercial and Insolvency Solicitor who has spent most of his working life in London and the South East trying to help business men and women to increase their net worth. He has worked in both regional and top ten national practices. He is a Consultant Solicitor to NDP.
(Please Note: This blog is not formal legal advice and should not be relied upon in isolation, it is merely a puff piece intended to drum up business in case I have a spare moment and is issued for general information purposes only and does not constitute legal or professional advice. It should not be used under any circumstances as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the publication date of this article.)