Purchasing Assets from a Distressed Seller
We are receiving a number of memoranda of sales from insolvency practitioners, and others, relating to struggling business, referred to as “distressed” or “accelerated sales opportunities”. We are forwarding onto clients who might be interested however many buyers have never purchased a business and/or assets in these circumstances and may be unaware of the key differences between a solvent and insolvent purchase, and the purpose of this article is to set out the key difference.
Because of the lack of available cash to fund the trading of a business (and the risk for an administrator in trading a business whilst insolvent) the sale process is usually accelerated and takes between 5-10 days from an offer being accepted to completion, compared to solvent acquisitions which can take months. Time is of the essence and therefore any potential buyer needs to take a commercial view on the transaction and rely on pragmatic due diligence which focuses on the key issues at a very high level.
Any prospective buyer will be expected to take on any commercial risk associated with the business and assets. The principal “Caveat Emptor” meaning “Buyer Beware” applies, as any potential buyer will be buying the assets “as seen” subject to any defects (including defects in title (ownership see below), physical condition or claims by third parties). There will be no party available to give the usual warranty protections around the issues , which would be a big part of a solvent sale. As a result of this the purchase price is usually discounted to reflect the risks being assumed by a buyer and this can be attractive to potential buyers who are prepared to take a “punt”.
There are pitfalls for the unwary here –sellers will want buyers to assume responsibility for performing ongoing contracts, even if loss making. Poorly/unreasonably drafted arrangements may fix the buyer with responsibility for historic product warranties . The right advisor will help you navigate through this minefield.
No Warranties or Title Covenants
Neither the insolvent seller or the appointed insolvency practitioners will offer any warranties or title covenants in relation to the business and/or assets. In addition, a potential buyer will not have the benefit of any title covenants which would usually be implied by the Law of Property (Miscellaneous) Provisions Act 1994 as these are usually specifically excluded. This approach is in complete contrast to a purchase from a solvent seller where the buyer can expect the seller to warrant that it owns the assets, they are in good order and that there are no liabilities and where a buyer can bring a action against the seller if the warranties are untrue.
The risk is always with the buyer in an insolvent acquisition and the insolvency practitioner will always exclude personal responsibility.
Whether a buyer assumes the employees will depend on whether the seller is in liquidation or administration as the appointment of administrators does not terminate any contracts of employment and therefore the Transfer or Undertakings (Protection of Employment) Regulations 2006 are likely to apply. This could mean employees transfer to the buyer which means the seller’s rights and duties associated with these employees will transfer and become a liability of the buyer. Expert advice is needed to understand the risks in this area, and what can be done to avoid or reduce them.
Many suppliers incorporate “retention of title” clauses into their terms and conditions of supply. The effect of this is that a buyer may pay good money to a distressed seller to purchase the stock only to find that the seller has no rights in it as the supplier has not been paid and they have a retention over the stock. As a result of this a buyer might be bound to return the stock to the supplier and even worse the buyer might have to indemnify the appointed insolvency practitioners against any claims, they may have made against them resulting in a double loss to the buyer.
A combination of sound commercial judgement and legal knowledge is needed to understand the likely outcome on stock , and the opportunities and risks for the buyer
These are just a few of the key issues which may arise in a distressed purchase however buying a distressed business can have its advantages and be for the commercial benefit of a similar or competitive business, it is however vital that any potential buyer takes legal advice to avoid risks and protect their position as much as possible.
Emma Pern (email: email@example.com) and Matt Collen (email: firstname.lastname@example.org) in the Corporate team at Sintons regularly act for buyers of distressed business and would be happy to discuss any issues or assist you with any distressed (or solvent) acquisitions. In addition, they have close relationships with a number of insolvency practitioner in the region so if wish to know about any distressed sales in a specific sector please let them know.