How to buy the business of an insolvent company – pitfalls and benefits
It is often the case that even a company that has fallen into insolvency will still have some viable parts to the business that are worth saving. A purchaser looking to buy some or all of an insolvent business can often get quite a bargain, but an attractive purchase price must be balanced against the issues that arise with buying a business from an insolvency practitioner, compared to a solvent trading company.
In this article, Harper James Insolvency Solicitor Eleanor Stephens discusses how you can purchase an insolvent company, the potential benefits of acquiring assets of an insolvent company and the risks of inheriting liabilities.
What constitutes an insolvent company?
Sales are generally made by a company that is either in liquidation or administration. Both can be arranged in advance of the formal insolvency appointment, with the sale taking place on the same day as the appointment of the office-holder (the liquidator or the administrator). These are known as pre-packaged sales.
Alternatively, most sales of a business as a going concern are with a company that is already in administration, which is often still trading in order for the sale to be effected as a going concern sale. A company in liquidation is likely to have ceased trading altogether, so any sale may simply be an asset sale only, rather than a business and asset sale.
What are the benefits for a purchaser?
If you are buying from an administrator, or by way of a prepack sale from either a liquidator or an administrator, you will generally be buying a business as a going concern. This means that often employees will remain in place to carry on the business, and suppliers and customers will still be on board. This can ensure that goodwill is maintained, which is often a valuable asset to a business.
At the same time, it is often possible for you to agree a novation of a lease of the business premises if required, although note that the sale will usually only provide for a licence to use the premises pending your own negotiations with the landlord to move the lease into your name following the sale.
All of the circumstances that led to the sale, and the general sale conditions will inevitably mean that the business can be purchased at a very good price.
What to look out for?
The downside of buying an insolvent business is that due to the usually tight timings required for the sale, and the overall circumstances of the company, there is generally very little given by way of due diligence before the sale.
Often you will have to rely on what knowledge you have of the business already to decide if the purchase is worth making. The insolvency practitioner (either as administrator or liquidator) will have very limited knowledge of the workings of the business, and often the original directors are not involved in the sale.
More importantly, there will be no guarantees or warranties offered to any purchaser. Everything is agreed to be sold as seen with no come back on the seller or the office-holder personally.
Indeed, the office-holder will always specifically sell without personal liability. You must buy subject to any defects in title or any issues that may exist whether known or not at the time of sale, and a standard term of sale is that the buyer is usually expected to indemnify the seller and the office-holder in respect of any future claims made relating to the business after the sale has taken place.
How does the process work?
Whether buying as a prepack sale, or from a company trading in administration, a purchaser will deal directly with the office-holder, not the directors. An offer will be made, which the office-holder will consider.
Office-holders have independent professional rules of conduct that they must follow to ensure that they get a good price for an insolvent business. They will obtain an independent valuation for the business and they are obliged to market the business for a short period of time to ensure that the best price in all of the circumstances is obtained.
If you are a former director of the company in insolvency, looking to buy the viable parts of the business, the rules are stricter. If you want to buy the business within 8 weeks of the administration date, then the administrator is required either to obtain the approval of the company’s creditors to the disposal, or you must obtain a ‘qualifying report’ which says that the sale is in not contrary to the creditors’ interests.
Next steps?
If you are interested in buying a business from an insolvent company, you should get in touch with the company to see who to discuss this with.
You should also seek the advice of an insolvency solicitor to advise you on the purchase of an insolvent company, and it would also be advisable to discuss the purchase and the tax aspects that might arise out of it.
This article was written for Handpicked Accounts by Eleanor Stephens of Harper James.
