Buying From Administrators
As has been reported in recent press and, unfortunately, as will continue to be reported over the coming weeks and months, Covid-19 has proved to be the final straw for many companies.
However, when a company goes into Administration it doesn't always mean employees lose their jobs; sometimes purchasers can be found and jobs saved. This was demonstrated fairly recently by Dawsons Music being been bought out of Administration by a Manchester based entrepreneur.
Whereas deals involving insolvent companies, especially so called "pre-packs", can come in for criticism (including for a perceived lack of transparency and/or accountability), they are often the best alternative, with the least attractive outcome being an entire workforce facing redundancy.
“For businesses which are lucky enough to be cash rich and/or who have the backing of third party funders still confident enough to lend, opportunities will arise in the current climate and beyond, which will facilitate acquisitions,” said Head of Corporate Commercial, Keith Kennedy.
At Pearson the corporate team has a longstanding track record of advising on private company sales and acquisitions, which include acting for the acquirers of insolvent companies. Deals involving insolvent companies are very different from acquisitions involving solvent companies, where the seller does not make a clean break from the business it/he/she has sold after receiving the purchase price. That is because in the case of solvent deals, the buyer will have based the price on various assumptions, which will include the value of the assets and previous performance, and these assumptions will be supported by detailed warranties in the Share Purchase Agreement or the Asset Purchase Agreement. The provision by the seller(s) of detailed warranties gives the buyer a significant degree of comfort, and also a means of recourse against the seller(s).
In contrast, acquisitions involving insolvent companies will involve very limited, if any, warranties. There will be no trading or tax warranties given, meaning that the buyer's exposure is significantly increased. Administrators and Liquidators will want to avoid any continuing liability, either for themselves or for the insolvent company, after completion occurs, hence the lack of warranties. The greater commercial risk to the buyer is normally reflected in the purchase price being significantly lower than it would otherwise have been had the target company been solvent.
“In such cases our corporate team can help buyers to focus on key areas of due diligence, albeit compared to a solvent acquisition, the level of due diligence which can reasonably be undertaken will tend to be much less and, in some instances, virtually non-existent; sometimes, buying from the Administrator of an insolvent company will be akin to "sold as seen".
“It is therefore important to identify areas of particular commercial and legal risk, and glean as much information as possible,” added Keith.”
“Given the above factors, the Sale and Purchase Agreement involving an insolvent company is very different to one involving a solvent business. We can guide buyers through this process, outlining the risks and only negotiating points in the Sale and Purchase Agreement that we know are worth negotiating with the Administrator.”
The employment solicitors at Pearson work closely with the corporate team when it comes to advising on TUPE given that exposure to employment related claims post completion tends to be one particular area of concern for buyers.
“This is brought into even sharper focus when acquiring the business and assets of insolvent companies from Administrators because they will not agree to take on any personal liability and will seek to minimise any post completion liabilities for the insolvent company.
“If you are looking at a particular opportunity involving an insolvent company, please get in touch. If you are an acquisitive buyer that is interested in such opportunities generally, then we can help you to source acquisitions and then to negotiate with the Administrators,” said Keith.
Please contact Keith Kennedy, Head of Corporate & Commercial on 0161 684 6942 or at firstname.lastname@example.org.
Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers LLP or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.
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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.
This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.