Buying assets from an administrator
This guidance is written in the third week of the UK Government’s response to the Covid 19 pandemic requiring all UK nationals to stay at home and only to go to work if you cannot work at home. This is having a profound effect on businesses across the country. According to the Federation of Small Businesses, SME’s (small and medium sized enterprises) make up 99.9% of all UK businesses. They account for three-fifths of the employment and around half the turnover in the private sector. Based on a survey by the British Chamber of Commerce, the Resolution Foundation estimates that nearly 50% of smaller companies are planning to use the Government’s Job Retention scheme to furlough most of their staff. The effects of the pandemic and Governmental and societal response to it, have opened eyes to new ways of thinking and working and will accelerate economic structural changes. To an entrepreneur, change opens up new opportunity and part of that will involve reusing and recycling the resources we have to find ways of addressing those new opportunities.
With this in mind, what are the issues to consider if you are thinking about buying assets from an administrator? Director and Head of Commercial and Corporate, Paul Hardman, explains.
Setting the Context – The Role of the Administrator
Administrators are no different from the board of directors in that they act as agents for the company with authority to direct its affairs (in fact during administration the authority of the directors is suspended). There are 2 key differences though. Firstly, administrators are personally liable on trading undertaken by them including employee contracts that they adopt (that is, allow to continue beyond 14 days) and on contracts made by them for the company, all rights against the company will only ever be (another) unsecured liability of the company.
The Buyer’s Approach
This has a few significant effects on the purchase contract. First, is that the administrators will expect the buyer to move and to complete very quickly – typically a few days but often, as long as real progress is being made, extended to a week or 10 days from start to finish. Second, the administrators will not accept any personal liability on the contract: they will be a party to enforce its terms only. And third, the buyer cannot expect any warranties even about the ownership of the assets it is acquiring.
The buyer must therefore be ready with an offer which in its pricing will necessarily take account of the inherent risks to the buyer. For example, this might mean valuing stock, on which there may be retention of title claims, at a fraction of its normal realisable value.
Typically, the administrators will require the whole of the purchase price to be paid in full on completion (and where there is a lender with security over the assets their hands may be tied). However deferred payments may be agreed where sufficient security for payment is provided by the buyer.
The Purchase Process
Although they are becoming rarer, where the buyer and selling company and administrators can work together to achieve a better realisation than would be achieved otherwise, there is scope for the deal to be run under the ‘pre-pack’ process. This is where the administrators market the business for sale and all the negotiation on the terms of the sale and purchase are concluded (but not signed) before their appointment. They are then appointed and the sale and purchase is completed.
Where a pre-pack does not apply the sale is through an auction process and will be secured, not necessarily by the highest bidder in absolute terms but, by the highest creditable bidder (i.e. able to move quickly and with ready money).
Terms of Offer
The offer should be careful to define the assets to be acquired. These could include both the tangible assets (property, equipment, plant, tools, stock and work in progress) but intangible assets such as domain address, website, proprietary software, trademarks and designs, customer lists and records and unfinished contracts. Excluded assets should also be carefully identified.
Typically, a buyer can expect any remaining employees (that is employees who were retained at the time the offer is made) to transfer under TUPE regulations. All other liabilities will typically be left with the company in administration but this does not mean that the buyer may not in the end have to reach a deal with some creditors where they are essential to the ongoing trading of the business (key suppliers, landlords, customers with the benefit of deposit payments or gift cards etc).
Preparing to buy assets from an administrator
In these times of lock down, preparation will need to be all the more careful and detailed. The sheer practicalities involved in the process, many of which we can no longer take for granted, such as the act of signing documents, take on new importance. Technology is available to assist us for instance by allowing a large number of documents to be made available for review through data rooms as part of the due diligence process, and through new communication means that allow video conferencing and group meetings but only if everyone involved in the deal has kept up to date with those technologies.
Specialist commercial and corporate solicitors
If you would like to discuss how to approach administrators and how to shape an offer, of if you are ready to proceed on an offer, our expert team of commercial and corporate solicitors can help. We can advise on the risks involved and pitfalls to avoid, and act on the deal to complete the offer. With the latest communication and document review tools and, working remotely, we are providing a complete service to clients across all areas of our practice.
For an initial discussion please contact Paul Hardman by email email@example.com or call 0117 906 9425.