Buying a business in administration - things to know

Albert Einstein once said “in the midst of every crisis lies great opportunity” and this applies to the buying and selling of businesses. Buying an insolvent company provides an opportunity for buyers to enter a new sector or expand their existing business or portfolio. 

Purchasing the business and assets of an insolvent company for a low price is not the only benefit of buying an insolvent business, there is also the fact that the business’s liabilities to creditors remain with the seller after the transaction has completed.

Whilst the above is obviously good for buyers, they should beware. There are a number of traps that can be fallen into and that buyers need to be aware of when buying an insolvent business:

1.       Administrators will not accept personal liability

Administrators will not accept personal liability under the sale and purchase agreement and they will give no warranties about the assets and business being sold. Therefore buyers will not be able to bring a warranty claim in the event that things are not as they expect in relation to the assets and/or the business.

2.       Security over the assets to be purchased

Lenders to the seller company may have charges over assets. An Administrator can sell floating charge assets (such as stock) without the agreement of a lender; however they cannot sell fixed charge assets (such as plant and machinery). Even if the assets can be sold, a buyer should request that the Administrators secure a release of any charge over the assets sold.

3.       Real Estate

As timescales are short, there may not be time to secure a new lease over the business’s property or an assignment of the existing lease with the landlord. The Administrators will offer a buyer a License to Occupy the business premises. This gives time for the buyer to secure the assignment of the seller’s lease or a new lease post completion.

Whilst the above sounds ideal for the buyer, it is not all sunshine and roses. The insolvency of the tenant, non payment of rent and allowing the buyer into occupation of the business premises will all be breaches of the lease. The consequence of this is that a landlord will have no obligation to allow the existing lease to continue, even if rent is being paid by the buyer. The landlord may demand that a buyer enter into a new lease and may demand higher rent.

4.       Due diligence

Buyers have to move quickly when buying a company in administration. There is often little time between a bid being accepted and the purchase being completed. It is not unusual for the solicitors representing the buyer and the administrators to work late into the evenings or over weekends to meet the tight timescale.

What it means for a buyer is that it or he has little time to carry out due diligence. In certain deals, the Administrators may even refuse to allow due diligence to be carried out. Buyers also need to be aware that any information provided by Administrators cannot be relied upon.

5.       Indemnities

A buyer usually must give indemnities against any liabilities that may arise in connection with the assets and business or as a result of the sale and purchase. This may include, but are not limited to employee liabilities and claims by those who might have title to the assets sold.

6.       Suppliers and retention of title

A buyer usually has to take the risk that stock might belong to unpaid suppliers. Where goods are sold on terms that provide for a supplier to retain title, a supplier may have a right to ask the Administrators to give the goods back. Any claims by a supplier can be defeated and often are, however successful claims could reduce the value of stock substantially. This could lead to issues with stock levels and cash flow for buyers.

7.       The seller’s employees transfer to the buyer

The Transfer of Undertaking (Protection of Employment) Regulations 2006 will usually have the effect of transferring employee contracts to the buyer automatically. This also brings with it (depending on the number and location of employees) certain obligations to inform and consult about the transfer of employment contracts and changes to them. Failure to comply can result in employment tribunal claims and awards in some cases of significant damages (compensation).

Considering the time critical nature of a transaction involving the purchase of a business in administration, it is vital for buyers to seek legal advice from a solicitor with experience and expertise in such transactions. 

If you require assistance with purchasing an insolvent business, contact Thomas Emmett on 01245 453847 or thomas.emmett@birkettlong.co.uk for a no obligation conversation.