Tax & Accounting News

Buying Insolvent Companies

02/12/2008

The current economic climate is taking its toll on the business sector. While every business failure is a devastating for those involved, insolvent companies can provide value for money acquisitions for investors, although there are a number of key issues of which they need to be aware.

Get your timing right

When a company is in liquidation, administration or administrative receivership, the person making decisions about its future will be a licensed insolvency practitioner and buying assets at this stage gives the buyer greater security.

If assets are acquired before the appointment of an insolvency practitioner, they may subsequently require evidence that the buyer paid an appropriate price.

Check on the insolvency practitioner

When acquiring assets from an insolvency practitioner, it is sensible to check that their appointment is valid and which assets they are selling, i.e. are they also selling the assets of some or all of the subsidiaries of an insolvent parent company.

Third party consents

A company may have contracts with customers, suppliers or a landlord with a clause allowing them to terminate the contract if insolvency occurs. If these contracts are integral to the business, the buyer would be wise to seek the approval of third parties.

Registered security

Carrying out a search to identify who has registered security over the company will allow the buyer to seek releases from charges to which the sale may be subject. This must come directly from the charge-holder or holders.

Title issues

Stock and work in progress may be subject to retention of title claims by suppliers, who will be entitled to reclaim assets, even if they have apparently been sold to the buyer. The buyer should make an arrangement with retention of title creditors or acquire such assets only if they will receive a refund if a retention of title claim is subsequently successfully made by a supplier.

Act quickly

There may be a number of parties interested in the assets, which means that a buyer who can act quickly will have a useful advantage, for example by having funds in place to pay the consideration and being prepared to carry out speedy due diligence.

Buyer beware

In insolvency sales, the terms of the sale agreement tend to be in the seller’s favour and the insolvency practitioner will not give the same warranties as a solvent seller. The buyer should focus on getting the best possible price or other commercial considerations rather than wasting time on non-negotiables.

Employees

When an insolvency practitioner is appointed, they may dismiss some staff to make the company more saleable but contracts of employment are only terminated in compulsory liquidations.

Under TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006), contracts of employment transfer to the buyer and employees are protected in various ways against dismissal. The purchase price should reflect the risk to the buyer of employee claims.

Assets sold to directors

The buyer should be aware that under the Companies Act 2006, an ordinary resolution of the sellers’ shareholders is necessary to approve a purchase of substantial assets from the insolvent company from a director of the company itself or a holding company. Substantial is defined as worth more than 10 per cent of the company's asset value to a value of more than £5,000 or more than £100,000.

Phoenix trading

The Insolvency Act 1986 restricts the use of the failed company’s name or trading name to prevent “phoenix trading”, where directors of a company start a new one with the same name, to capitalise on the goodwill of the failed business while escaping liability for its debts. Directors or shadow directors of the company in the 12 months before it becomes insolvent are required to undertake certain obligations before acting as directors or shadow directors in a company with the same or a similar name. The penalty for failing to meet these obligations can make the directors personally liable for the debts of the successor company.   

For more information on any aspect of insolvency, or buying an insolvent company, please contact us.

 

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