Buying a company out of UK insolvency: an introduction

The main advantage to potential buyers is that the sale price is discounted to reflect the risk of taking on an insolvent business, without warranties and with minimal historic information. Also, because it is an acquisition of assets rather than shares, the business will transfer free of most liabilities, with some exceptions. The discount to the normal market price reflects the risk of taking on an insolvent business with limited due diligence or background information. A potential buyer must take into account the relevant risk factors to determine an appropriate offer price or decide whether or not to proceed at all.

Read more on distressed acquisitions

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

There are tight time constraints involved in buying a company out of an insolvency process. It is vital that any potential buyer acts quickly and understands the key principles and risks associated with buying a distressed business.

For a buyer to successfully negotiate and complete the acquisition, they must become familiar with the main principles of insolvent business sales as distinct from solvent acquisitions.

Who sells the business and assets? What role does the insolvency practitioner play?

In most cases, where a company is subject to a formal insolvency process, the powers of its management cease and licensed insolvency practitioners (IPs) are appointed to run its affairs. IPs are often senior staff from specialist restructuring teams within an accountancy firm and are licensed by one of the UK's recognised professional bodies to take such appointments.

At its heart, the IP "steps into the shoes" of management and takes steps to further the interests of the creditors. The IP must act in the interests of the insolvent company’s creditors as a whole, acting objectively and efficiently.

The sale will be negotiated and concluded by the IPs acting as agents of the insolvent company.

Main principles of insolvent business sales

Potential buyers of a distressed business need to understand the main principles of the process, and the ways in which the process differs from buying from solvent companies. For example:

• IPs must secure the best available price – often in the shortest time – to maximise the return to the insolvent seller's creditors;
• there is very little time to negotiate the sale and complete the deal, meaning there are limited opportunities to undertake detailed due diligence yet on the flip side this affords buyers with a higher risk appetite and willingness to act quickly the chance to gain an advantage over their competitors;
• on distressed sales, the business will transfer free of most liabilities;
• the time available will often depend on the proximity of financial failure for the seller and the availability of funds to allow the company to keep trading while a suitable buyer is found;
• time pressures also mean the buyer must ensure that its funding and the mechanics of the acquisition are in place very quickly, because IPs may be prepared to sell to other interested parties if they know that they can conclude a deal quickly – potentially even if their offer price is lower; and
• many businesses are sensitive to an association with an insolvency process, particularly in relation to key customers and staff, so a ‘pre-packaged’ practice has developed by which IPs seek to negotiate the terms of the deal prior to their appointment so that the sale takes place seamlessly, immediately following their appointment, with the minimum of disruption to the target business. The pre-pack process aims to preserve value in the business, and whilst it may curtail the IPs' ability to market the business, IPs will be mindful of their regulatory and professional responsibilities to obtain the best price available for the benefit of all creditors.

How might a distressed purchase sale agreement differ?

The sale agreement is typically drafted by the IPs' legal advisers with drafting that is heavily weighted in favour of the seller and the IPs. Typical characteristics include:

• both the insolvent seller and the IPs are parties to, and sign, the sale contract. The IPs act as both agent of the seller and personally, to benefit from exclusions of personal liability in their favour;
• ·no title guarantee to the assets. Instead, IPs will sell "such right, title and interest as the seller may have" in the relevant assets which could be anything from full title to disputed title or no title;
• IPs generally provide no assurances, warranties or indemnities to the buyer, but it is sometimes possible for a buyer to secure concessions if they are in a particularly strong bargaining position;
• IPs will obtain extensive indemnities from the buyer to protect themselves from exposure to liabilities as a result of entering into the sale. Indemnities are also required to preserve the value of the company’s assets given that an administrator has a duty to the insolvent company’s creditors; and
• although the status of the IP often carries certain statutory protections, IPs will invariably insist on absolute exclusions of personal liability.

What should a buyer look out for in an insolvency sale?

There are particular issues buyers will need to address when approaching a potential insolvency acquisition. The most encountered issues range from timescales and key terms to acquisition vehicle and exclusivity. A buyer can elevate the attractiveness of its offer terms by addressing these key terms at an early stage as part of formulating its offer terms.

Offer terms

IPs will normally require a 'subject to contract' offer to be made in writing identifying the assets to be bought and the offer price. If there is time and the situation warrants it, a more detailed ‘heads of terms’ document may be drawn up to identify more clearly the key terms of the proposed deal. As is typical in non-binding offer letters, the offer price may remain subject to further due diligence, allowing a buyer to re-assess the price if circumstances change.

‘Going concern’ issues

Consideration must be given at an early stage to determine whether the acquisition will be purely of assets or of the business as a going concern. This can have major effects, in particular on employees, pensions and tax issues.

Timescales

The buyer should identify and agree realistic deadlines for completion with the IPs and the seller and these deadlines should be reviewed regularly. When assessing competing offers, IPs and the seller will ordinarily be looking for a buyer who has strong credibility to transact quickly on an expedited timeframe.

Exclusivity

IPs will often seek to use the existence of other potential purchasers to achieve the best price for a deal in the shortest time, in a bid to secure the best return to creditors. It may be desirable, although practically it can be challenging, to agree a period of exclusivity during which time the IPs are precluded from negotiating with other parties.

IPs are usually reluctant to commit to exclusivity, as it may cut across their duty to secure the best return to creditors from the sale. The buyer's ability to do this will depend on what advantage can be offered to the IPs in return. This could be in terms of an exclusivity fee or deposit; a higher price; funding the seller's trading in the meantime; or a commitment to complete within a short timescale.

If exclusivity is required, the buyer should explore the possibility of exclusivity with the IPs at an early stage.

Funding

The process of securing funds for completion and future cash flow, either by way of debt or equity, can be time-consuming. It can involve as much, if not more, preparation, documentation and advice as the sale itself. Proof of funding is often a prerequisite to IPs agreeing to continue sale negotiations.

It is vital that resources are applied in good time to meet expected deadlines. Buyers, and in particular international buyers looking at overseas acquisitions, should not underestimate the management time investment required to set up operational aspects of any purchase.

Acquisition vehicle

The buyer will need to ensure that the company which will be used to make the acquisition is in a position to do so, including obtaining the usual shareholder, board or other internal approvals.

Often a purchaser will be advised to incorporate a new acquiring vehicle rather than absorb the acquired assets into its existing business. This can be helpful if any management need to be retained as directors and to contain any loss-making risk of the new business going forwards.

If the acquiring vehicle is a new company, arrangements will need to be made to quickly incorporate that company, and register for VAT or comply with any other authorisations or regulations relating to the business. Of course, this is no different to a solvent transaction – but is particularly significant due to the restricted timeframe within which a buyer has the opportunity to bring all of this together, whilst the target is operating in distressed circumstances and the viability of the business is being negatively impacted.

Deferred payments and post-completion obligations

Where payment of the price is deferred or there are other commitments of the buyer to be discharged after completion, the IPs may be unwilling to complete the sale if they have insufficient comfort on the state of the buyer's finances. This often prompts the IPs to insist that the buyer provides security or that its parent company or individual directors provide guarantees or other forms of security. If required, the buyer will need to consider what form of security might be provided and how this could co-exist with other existing or proposed security to other stakeholders.

Connected parties

If the buyer and the seller are ‘connected’ by terms prescribed in legislation, and the buyer is purchasing all or a substantial part of the business and assets of the distressed company as a pre-packaged administration sale or within eight weeks of the company going into administration, then legislation requires the buyer to obtain an independent report which considers whether the purchase price and the grounds for the sale are reasonable in the circumstances. As an alternative to obtaining this report, the administrator could obtain creditor approval to the transaction, but usually due to timing implications this will not be practical.