Buying a company out of UK insolvency: included and excluded assets

Whilst a ‘subject to contract’ offer letter will broadly identify the classes of assets to be purchased, inevitably, the state of assets will have been affected by the seller’s financial stresses and the potential for adverse third-party interests over assets will increase.

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• Buying a company out of UK insolvency: an introduction
• Buying a company out of a UK insolvency: operational considerations

Each of the principal classes of asset raises specific issues, as discussed below. It is good practice to undertake a thorough inspection of tangible assets on site immediately prior to completion, particularly where the information provided by the IPs about the assets is limited.

Assets to purchase

Physical stock or work in progress

Often it is not possible to establish a precise value of stock in time for completion or records can be inaccurate or incomplete. The sale agreement may provide for an adjustment to the price based on a subsequent stock-take.

Plant and machinery

Concerns surrounding plant and machinery will focus on attributing value to assets which are obsolete and no longer used, questions surrounding title to any assets which are fixed to the landlord's premises, and the cost of removing items if the premises are not taken on. Care should always be taken to assess the health and safety impact of acquiring any plant and machinery in particular as there is a risk that maintenance may have been impacted by the seller’s cashflow constraints.

Leasehold land or buildings

Most issues arise out of the buyer's acquisition of the right to use and occupy leased premises after the sale. The safest course is for the buyer to take an assignment of the lease. However, this can be time-consuming and often logistically difficult. If it is part of the buyer's plans for the target business, it is essential that a realistic assessment is made of whether, and on what terms, the landlord will accept the buyer as tenant.

It is common practice for an IP to grant the buyer a short-term licence to occupy a leasehold property whilst the buyer reaches an agreement with the landlord. The licence will normally be granted without landlord consent and so will ordinarily be terminable without notice in order to protect the seller, and IPs, from the risk of forfeiture by the landlord and liability for rent during the period of the buyer’s occupation. Often, the buyer will agree a deal with the landlord directly to continue the licence period, assign the existing lease or enter into a new lease on different terms. If a landlord is difficult, the IPs may be able to provide assistance.

Onerous/unwanted assets

The buyer's strategy for dealing with any onerous or unwanted assets at the company's premises will depend on whether the property where the assets are situated is freehold or leasehold and whether the buyer is also buying the property. It is unlikely that the IPs will incur the cost of dealing with the assets themselves.

If the buyer is acquiring the company's freehold or long leasehold property where the onerous/unwanted assets are situated then, as the cost of removing the assets may impact on any subsequent sale, the buyer may want to consider seeking a reduction in the purchase price.

If the buyer is acquiring the company's leasehold property, it should take photographs of the site on completion and prepare a new schedule of condition shortly after completion. Any claim in respect of the current state of disrepair of the property will be an unsecured claim in the administration of the company. However, a landlord may make remedial works a condition of assigning the lease or allowing the buyer to enjoy continued occupation of the property.

If the buyer is only entering the property under the terms of a licence to occupy, any unwanted assets should be specifically excluded from the sale. Buyer’s may need to seek advice in relation to third party assets that remain on the property where such third parties want access to inspect and remove those assets.

Intellectual property rights

Care should be taken to confirm what rights the seller may have in the intellectual property rights (IPR) it uses and whether they are required by the buyer. If the insolvent seller owns registered IPR, it may be central to the business, such as trade marks. The buyer will almost certainly require further documentation and assistance from the seller and the IPs to complete a legal transfer after completion of the sale. The IP’s future co-operation is often limited in scope and time, and secured at the buyer’s cost. The seller may also have the right to use other IPR under licence, like computer software. The buyer will need to assess the importance of such assets and make arrangements where necessary to transfer the benefit of such rights from the seller.

Goodwill

The residual value of the company's business is usually attributable to its goodwill. It is closely related to the right of the buyer to continue that business using its existing brand names. The buyer will likely want to purchase the trading name of the business and continue trading under that name. There are restrictions on the re-use of a company name, including a risk of personal liability, if individuals behind the buying company were also directors or shadow directors of the seller.

Book debts and receivables

Typically, the seller's right to receive payment for goods supplied to customers prior to completion is excluded from the sale – particularly where an invoice discounter or factor is involved. In that event, the question is normally one of apportionment and whether the IPs require any assistance in collecting pre-appointment book debts. If the buyer is to assist in book debt collection there is often scope for a commission or some form of compensation to be paid for the buyer's input.

If the pre-completion book debts form part of the sale, the buyer will need to consider whether the seller's insolvency is likely to impact on their collection and whether some form of discount from the face value of the debt should apply.

Customer and supplier contracts

The buyer should decide whether it is worth acquiring the seller's rights under customer and supplier agreements in the sale. The decision will turn on whether any such agreements remain intact as a result of the insolvency. Long-term, and potentially valuable, agreements are often terminable on insolvency, either as a result of specific provisions or because of the seller's lack of performance. In that case, they are simply excluded from the sale and the buyer will need to make its own arrangements and enter into new contracts with key customers and suppliers.

If such agreements are intact and required by the buyer, before it can take the full benefit of those agreements they will need to be novated or assigned to the buyer with the consent of the customer or supplier post-completion. It is useful to ensure that the IPs agree to assist in signing such transfer documents either before or after completion of the sale. If the IPs are required to sign any transfer documents after completion, then they may ask to do this at the buyer's expense.

Assets excluded from purchase

Retention of title stock

Where the seller's stock is subject to valid retention of title (ROT) or has been supplied on a consignment basis, the seller's ability to give good title to the stock is impaired. The IPs will be potentially liable to the supplier if they purport to sell such stock to a third party.

The risk to the buyer of ROT stock tends to be one of potentially over-valuing the level of stock in the business. Where possible, ROT stock should be identified prior to acquisition and details placed in a schedule to the sale agreement and, if appropriate, a retention from the purchase price provided for. ROT issues can be significant where a company has been trading 'hand to mouth' for any period of time.

Hire purchase or leased assets

These give rise to issues similar to those encountered with ROT stock. In addition, such items, like plant or vehicles, are more likely to be central to the continued operation of the business. Standard hire or lease agreements are usually terminable on insolvency. Not only is it important to identify such items by scheduling them, the buyer will also need to ensure that go-forward arrangements are quickly in place with the hirer or lessor of such items. Alternatively, the IPs may be prepared to discharge the lease liability from the sale proceeds  to give good title after completion.

Next steps

Once the buyer has determined which assets it wishes to acquire, and those it will be leaving behind in the insolvent entity, it will then need to undertake a ‘helicopter’ view of its decision to determine whether wider factors influence its decision to acquire as “a going-concern” as opposed to an asset sale.