The assets of insolvent companies are usually discounted. This makes them an attractive proposition for buyers. Nonetheless, buying the business and assets of insolvent companies is not straightforward.
When considering these types of transactions, complying with UK insolvency law is vital. Before proceeding, the advantages, disadvantages and potential risks should be carefully assessed. Set out below is some information that should help you navigate the process with confidence.
The Framework of UK Insolvency Law
The Insolvency Act 1986 provides the legal framework for all insolvency matters in the UK. It governs the sale of assets during insolvency and the conduct of administrators, liquidators and insolvency practitioners.
Buyers may have to navigate the following processes:
- Administration - This process generally tries to stabilise the business and provide maximum value for creditors.
- Liquidation - This process focuses on formally winding up the business and selling assets.
- Pre-pack administration - A sale agreement can be reached before the business formally enters administration.
Each process has advantages and disadvantages, and buyers should seek legal guidance before proceeding.
Why Purchase the Assets of an Insolvent Company?
Purchasing the assets of an insolvent business can be advantageous for the following reasons:
- Price reductions - The assets of an insolvent business are often sold below market value.
- Strategy - Purchasing an insolvent company can be about strategy. Buyers may acquire valuable intellectual property and access a larger market share.
- Efficiency - The sale of assets during insolvency tends to be quick.
While purchasing the assets of an insolvent company can be appealing, there are potential drawbacks.
The Risks of Buying an Insolvent Business
Buying an insolvent business can be lucrative, but there are risks to consider. These include:
- “Sold as seen”- Assets sold during insolvency typically have no guarantees about condition or ownership.
- TUPE regulations - Pursuant to these regulations, existing employees may transfer to the Buyer. In addition, the Buyer may inherit the associated employer obligations under the TUPE regulations.
- Encumbrances - Third-party creditors may have a claim to assets, requiring debts to be settled before transfer.
Due Diligence for Buyers
Due diligence is essential when acquiring assets from an insolvent business. Due diligence should cover not just the assets and liabilities to be acquired but also the nature and extent of the insolvency process and the authority of the insolvency practitioners to contract with the Buyer.
Key Points
The following checklist should help you make an informed and strategic decision when purchasing the assets of an insolvent company:
- Seek accurate valuations - Offers can be highly competitive because administrators try to maximise returns for creditors. However, administrators are also under pressure to sell quickly so as to avoid further losses. Make sure you seek an accurate valuation that reflects fair market value but also any discounts that reflect the risk taken by Buyers in purchasing assets with little to no guarantees as to quality or title.
- Verify intellectual property ownership - Intellectual property may be the most valuable part of the transaction. It’s important to understand any third party claims and to clarify that the IP will belong to the Buyer after the sale.
- TUPE regulations - Assess whether you will inherit current employees and prepare for any obligations under UK employment law.
A Calculated Risk That Can Pay Off
Buying the assets of an insolvent company can be a lucrative strategy, but it relies on due diligence and a deep understanding of UK insolvency law. Being armed with accurate information reduces the risks and helps you maximise the benefits of your investment.
How 3CS Can Help
Our team of commercial and corporate solicitors have expertise in insolvency law. We can help you assess your options and proceed in a manner that meets your best interests. If you need assistance purchasing an insolvent business or any other commercial matter, don’t hesitate to get in touch.
