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Risks associated with buying a business out of administration

22nd January 2024

Risks associated with buying a business out of administration

As businesses face insolvency, the disposal of assets in distressed sales can often become a reality. In the current economic climate, we have seen a noticeable increase in the number of distressed sales and have acted for many purchasers who have been burnt in the process.

While buying an insolvent business can offer commercial opportunities, the purchase price is typically less than you would expect to pay for the business and assets of a solvent business; this benefit is balanced by the risks associated with purchasing a distressed business. 

Understanding the risks associated with purchasing a business out of administration (or other insolvency process) is crucial for potential buyers, and careful budgeting for the administrative and legal work that ought to be carried out when purchasing a distressed business is essential for a successful acquisition. 

Achieving the best price

Insolvency Practitioners (IPs) play a pivotal role in advertising the sale of a target company (target) and negotiating terms with potential buyers. While insolvency practitioners have duties to justify the sale terms to the creditors, purchasers must be vigilant about achieving the best possible price. Unlike transactions involving a fixed charge receiver, purchasers need to navigate a negotiation period to ensure the sale is at arm's length and justifiable to all parties involved.

"Sold as seen" principle

Buyers must recognise that the information provided by the insolvency practitioner is based on data gathered from the target's management. The "sold as seen" principle places the responsibility on the purchaser to conduct thorough due diligence and verify the information contained in the sale pack. Unlike traditional commercial acquisitions, the sale agreement will not include warranties over the accuracy of the provided information.

We regularly act for purchasers of distressed sales and make sure we advise our clients on the due diligence process. Where thorough due diligence is not possible, the client must be satisfied with the risks of purchasing assets to which the seller may not have good title or which may not materialise after completion.

Speed and risk

Insolvency practitioners typically seek a swift conclusion to the sale to prevent asset deterioration and ensure a seamless transfer of the business as a going concern. However, the speed at which these transactions must be completed can introduce additional risk for the purchaser, who must weigh the trade-off between the urgency of the sale and the inherent risks associated with an expedited process in which the due diligence can be limited.

Evaluating the condition and title of the assets, reviewing the assignability of any contracts, formalising licenses and assignments of property and assessing TUPE liability are just a few of the important considerations for purchasers.

It is recommended that the purchaser conducts a site visit before completing the transaction so as to check the assets they are purchasing.  

Limited warranties and no personal liability of the seller

As previously mentioned, purchasers in insolvency transactions will not receive the benefit of warranties or indemnities in the sale agreement.

Insolvency practitioners lack first-hand knowledge of the target, and their primary focus is realising assets and distributing them to creditors from the sale proceeds. They will act as office holders, which means they will expressly exclude personal liability and will not be able to give any warranties or indemnities to protect the purchaser post-completion.

It may be possible for the buyer to mitigate some of that risk with warranty and indemnity insurance. However, this may impact timings, and the extent of cover will likely be limited unless brokers are engaged early in the process to address the insurer's demands on the scope of due diligence.

Buyers should also consider the need to assess the validity of the insolvency practitioner's appointment to ensure there is authority to sell the target.

Ensuring the target has title to assets

Again, due diligence in this respect is paramount, and it is not sufficient to attend a site visit, assuming that you will be purchasing all the assets at the premises.

Buyers should ensure that they verify the title of the assets, especially in cases involving group companies. Identifying charges or security over assets, such as intra-company security or quasi-securities, requires meticulous due diligence and should be conducted to avoid post-completion complications and disputes.

 

Our team of specialist Insolvency Lawyers regularly advise both purchasers and IPs in relation to distressed sales in administrations and liquidations. If you require advice please contact Lauren Hartigan-Pritchard, Partner & Head of Restructuring & Insolvency at Higgs LLP on 07595 657642 or by email at Lauren.h-pritchard@higgsllp.co.uk

 

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