Buying the business of an insolvent company

While the first few months of 2011 have provided some encouragement in terms of economic recovery, unfortunately there are still some businesses which have not been able to survive the recession, and have become insolvent.

For those more buoyant businesses, this may provide opportunities to snap up a bargain. There are, however, certain things to bear in mind when buying an insolvent company.

The Administrator
Usually where an insolvent company is available for sale, it will have gone into some form of administration, and as such it will be the administrator, and not the directors, who will be running the company. A prudent buyer should therefore take steps to ensure that the administrator has been properly and validly appointed, either under the terms of the court order, or the security documentation.

Timing and price
It’s in the interests of all parties to ensure that any sale goes through as quickly as possible. Once a business becomes insolvent, its status in the marketplace will disintegrate, and debtors and creditors will become increasingly disinclined to deal with that company. Similarly, the sooner the administrator can get his money, the sooner the creditors can be paid out. Bear in mind that the administrator is under a duty to obtain the best price reasonably obtainable in the circumstances (although this will rarely be the full market value).

Ownership of assets
When buying the assets of an insolvent company, it is essential to confirm that the company is the owner of the relevant assets. This is especially relevant where there is a group structure in place. In addition, especially where the company is a manufacturer or supplier of goods, certain assets may be subject to retention of title provisions (assuming the creditor has not been paid), and the buyer will have to take that risk on purchase.

A major feature of any trade sale agreement is the warranty schedule, giving protection to the buyer. When buying from an insolvent company, the administrator will invariably refuse to give anything but the most basic warranty protection, on the basis that they are not privy to the relevant information, and that they do not want to be in a position whereby they have to repay money (which may have been distributed to creditors) once payment has been received. This lack of warranty protection should however assist the buyer in price negotiations.

Employees and TUPE regulations
Contrary to popular belief, TUPE does still apply when buying an insolvent business. A buyer will rarely wish to take on the entire workforce in these circumstances, and specialist advice should be taken to ensure the relevant obligations to inform and consult are complied with. There may be ways to deal with this situation, and the existence of the National Insurance Fund can assist with certain liabilities, however great care should be taken when seeking to dismiss any employee.

David Filmer
Harrison Drury Solicitors