Buying A Business To Turnaround 3: Buying Out Of Formal Insolvency

Sales of businesses in a formal insolvency process will be conducted, often these days as a prepack administration, by Insolvency Practitioners (or IPs) working in one of the 'bankruptcy companies'. This article looks at the issues involved in making such a purchase.

Traditionally if an IP was looking to sell any form of decent trading business, having been appointed they would then usually conduct a tender sale in which, having advertised the business, they sought best offers from potential interested parties (confusingly also often known in the trade as 'IP's). It's worth reembering that from the insolvency practitioner's point of view, the best offer is not simply the highest one, but is the highest bid which the IP judges has the best chance of completing.

As the uncertainty involved in being in Administration for any period of time is often very damaging to the realisable value of the business, many sales are now quietly marketed in advance. They are then arranged as prepacks or prepackaged Administrations, in which a the sale has been agreed prior to the Administrator's appointment which they then immediately execute once in office.

Whatever the approach, to ensure that you end up acquiring a business from an IP you therefore have to win the tendering process. To do so you should put in the highest bid that you wish to make and that the same time ensure that you have evidence that you have funds available with which to complete the deal.

Because the IP is under a duty to get the best available price for the assets they will generally not give you exclusivity until the deal is signed in case a significantly better offer turns up and they will in some cases continue to actively solicit offers. The IP may also try to keep other counter bidders warm in reserve in case you fall out. In turn this means that until you've signed sales contract, you are not bound in either.

However in practice if the IP thinks you are serious you will start to move towards negotiation and sales contract with a view to completion and the further down this process you get, the colder other counter bidders tend to become as the IP pays less attention to them and the deal gets older. The longer this process goes on before completion, the less options the IP may have of turning to other parties and the higher costs they will have run up on the case in managing to this point. As a result, IPs will seek to keep the period between agreement on offer and completion to a minimum and you will generally have very little opportunity to conduct any meaningful due diligence.

Some buyers therefore try to string the IP along for sufficient time that alternative bidders have dropped out and then to reduce their offer the level they actually want to pay immediately before the anticipated completion. The dangers with this approach of course are twofold, firstly that the IP has either managed to keep another bidder interested, although you should be aware of the fact if you are in a 'contracts race'; and secondly that the delay in completing a purchase of the business means that it has suffered significantly more damage during the insolvency process or its cash crisis than had you moved to a quicker completion.

When dealing with an IP there are a number of specific issues to bear in mind:

- The IP will usually only be acting as an agent for the company in selling and will only sell what right and title the company has to its assets. As they've not been in place for any meaningful period of time and will not have conducted any audit or verification work into the business affairs IPs will in general offer no warranties whatsoever as to the assets included in any sale; other than that as far as possible they will normally be happy to try to indicate the degree to which third parties are known to have an interest in the assets. These third parties typically include HP and lease creditors with whom any new owner of the business will need to negotiate the adoption of the old contracts, as well as suppliers who may have effective reservation of title (ROT or Romalpa after the case that established the principle) clauses under which ownership of the company stock does not pass to the company and tools supplier has been paid for goods. The effect of this is that much of the raw material stock that may be on-site, may not belong to the company.

- More crucially you will need to take a view as to how far you are likely to going to be able to rely on any key contracts held by the business continuing. You are likely to find that many contracts entered into by the company have clauses in them stating that they terminate in the event of the company's insolvency. This is one area where you will need to make a commercial decision and in many ways represents one of the riskiest element in buying a business from insolvency.

- If you're buying a business from an Administrator you will usually be able to agree a purchase of the company's name with them (and you will find that they will usually change the name of the resulting shell company to abc Realisations Limited). This can however be a problem if the company subsequently goes into liquidation and one of the directors of the company is also a director or involved in the management of your new company. This is because for five years from the date of insolvency they are prohibited from being involved with a company that is known by a 'prohibited name', which is any one that the old company used in the 12 months prior to its failure, however thetre is a process you can use to obtain clearance to use the name.

- How far do you plan to rely on using the old company's directors in your new one? If the potential success of the business is critically reliant upon the continued use of the old directors you need to consider very carefully the risks involved. The directors of an insolvent company can for example be banned from acting as directors under the Company Directors Disqualification Act, they may also be facing personal liabilities under personal guarantees given the company's borrowings to its bank or landlord, or may even face actions for wrongful trading, each of which are likely to provide a major distraction to them if nothing else.

- While most liabilities of the business will be caught by the insolvency, remember that employee liabilities under TUPE will generally still transfer and so in taking on the business you will be taking on both the liabilities for the employees retained and potentially be exposed to any claims for employees dismissed either by the business before insolvency or by the IP. In practice the level of such risks does cause some potential purchases out of insolvency to fail.

If you are buying a business out of insolvency you should use an experienced insolvency solicitor to help you. Such a solicitor will know the 'insolvency game' and you will save time as the solicitor will know what an IP will and will not do and will and will not sell as well as being used to the very pressured and high-speed process involved. An experienced insolvency solicitor won't waste time for example in seeking to try and negotiate warranties from insolvency practitioner that the IP will simply not give, something inexperienced general practice solicitors often do.

Given that insolvency is a relatively small world, a good insolvency solicitor will generally also know and deal with the insolvency practitioners in their area on a regular basis and will therefore normally have a reasonable working relationship with the IP on the other side the table. Again, this can act to cut down the level of delays and misunderstanding as well as giving comfort to the IP that you are a serious purchaser.

Finally, however, doing the deal is not the end of the process as you then have to go on to make the turnaround work, a subject we will look at in the next article.