Buying a company out of a UK insolvency: operational considerations

On the long list of other matters that buyers need to take into consideration before, during and after the acquisition are the impact of ‘ransom’ creditors and disgruntled suppliers, tax and regulatory consequences, and the transfer of the insolvent company’s employees to the new owner.

Read more on distressed acquisitions

• UK distressed acquisitions can offer strategic gains to acquirers
• Buying a company out of UK insolvency: an introduction
• Buying a company out of UK insolvency: included and excluded assets

Ransom creditors and disgruntled suppliers

Where a business has struggled for a period of time prior to formal involvement of insolvency practitioners (IPs), a body of overdue creditors often builds up, potentially leaving certain key creditors with an opportunity to leverage their position to demand favourable terms or payments in exchange for continuing to supply essential goods or services. Buyers need to anticipate this risk and the potential financial impact as often buyers find themselves in a position where they may need to settle, or partially settle, outstanding payments and/or agree other trading terms to secure future supply.

Statutory provisions introduced in 2020 place certain restrictions on suppliers demanding payment for pre-insolvency debts as a condition for continuing supply.

Tax consequences

The tax consequences for a buyer in an acquisition of this nature are potentially numerous. Buyers should particularly evaluate how VAT, stamp duty land tax, intangible property, stock, capital allowances and buildings allowances may impact on the purchase.

Employees

The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) apply to the sale of a business, or part of a business, as a going concern if it retains its identity after the sale. It is not possible to contract out of TUPE.

TUPE normally provides a range of employment protections to transferring employees, but there are special rules for some insolvency proceedings. Limited exceptions to the normal rules apply depending on whether the insolvency proceeding is terminal – such as compulsory liquidation – or non-terminal, such as administration.

In practice, the standard wording of insolvency sale contracts requires the purchaser to assume employment liabilities for before and after the sale for those employees that transfer. Whilst the IP will need to provide certain minimum information, indemnities from IPs in respect of transferring liabilities are very unlikely. However, the buyer may use employee information and the scale of liabilities it is inheriting to determine whether a price adjustment is needed or whether a fund needs to be set aside for meeting potential liabilities.

As transactions are undertaken in relative secrecy, there is typically limited opportunity for providing information to, and consulting with, the employees on the transfer – and, equally, limited opportunity for a buyer to consult on any applicable proposed measures. These potential employee-related liabilities should form part of a buyer’s risk assessment for the transaction.

Competition issues

There are limited exemptions to the merger control and anti-competition regulations for acquisitions out of insolvency processes. Where a transaction is likely to result in the buyer either having a sufficiently large market share within its sector or taking on supply or licensing agreements which have the effect of restricting competition within that sector, specialist legal advice should be sought.

This issue should be considered in good time as it gives rise to some complex issues which may impede a speedy sale and runs the risk that an alternative buyer can complete quicker and become a more attractive proposition to the IP. The consequences of a breach of competition rules for the buyer and the business are potentially severe.

Regulatory issues

Businesses that trade in specific sectors will require that the business – and, potentially, named individuals within that business – hold licences or permissions from local or central government and regulatory bodies in order to operate. Depending on the type of licence, permission or accreditation, it may be possible to transfer these to the buyer from the insolvent seller, or in other cases, the buyer may need to factor fresh applications into its post-completion operational plan.

Certain transactions will also require the prior notification and, in some cases, approval of the secretary of state under the National Security and Investment Act 2021.

Environmental and health and safety issues

Environmental and health and safety issues will impact the new business as there is a significant risk that any cost-cutting measures implemented by the seller during a distressed trading period may have meant that environmental and health and safety standards have not been fully maintained. A full assessment of both environmental and health and safety measures should be a priority on acquisition.

Data protection and GDPR

Following acquisition, the buyer will likely obtain possession of personal data on employees, customers and others. Customer lists in particular may be a valuable asset which the buyer may want to exploit. UK data protection legislation may restrict the buyer's ability to exploit such data so careful analysis is required.