Insolvent Business Sales and Acquisitions

A pre-pack administration has become a key process for transferring an insolvent company’s business and assets to a buyer.  

This process involves the company entering administration, followed by an immediate sale to a buyer, for which negotiations have been conducted in advance by the administrator before their appointment.

Key points:

• The process to negotiate and then complete the sale transaction is undertaken by the proposed administrator, not the company’s directors.
• Any attempt by the directors to sell the company’s assets before administration risks breach of duty and/or transaction at undervalue claims being brought against the directors.
• Post-appointment administration sales can only be challenged by creditors applying to court to challenge the administrator’s actions, which is a far more difficult and challenging process than seeking to attack the actions of the directors.

Liquidation, whether compulsory or voluntary, is a terminal insolvency process.  

A liquidator (usually appointed in a creditors’ voluntary liquidation) can only continue trading for a few days where there is a realistic prospect of achieving a sale of the business and assets of the company as a going concern.  

In many cases, the sale would again be negotiated before the liquidator is appointed.

Key points:

• In a compulsory liquidation, the Official Receiver initially acts as liquidator of the company but is likely to seek the appointment of a private sector licensed insolvency practitioner if there is the prospect of a sale of the company’s business and assets.
• Due diligence opportunities for buyers are severely limited in such scenarios due to the need for the liquidator to achieve a quick sale.
• Liquidators are potentially more restricted in obtaining buyer indemnities on a business and asset sale than administrators due to the limitations on their ability to trade the company whilst negotiating the sale.
• Going-concern business and assets sales usually achieve a higher price than a break-up asset sale.

A CVA is a legally binding agreement between a company and its unsecured creditors to reschedule and/or write off debts.  It is possible for a CVA proposal to include a planned sale of the company’s business and assets.

Key points:

• Sales out of a CVA require the release of security from secured creditors before completion.
• Sales out of a CVA can provide a viable platform for the restructuring and disposal of a company’s business and assets while preserving continuity of the company’s ability to trade.

A pre-pack sale involves an insolvent company entering administration, followed by the immediate transfer of its business and assets by the company’s administrator to a buyer under a sale agreement that was negotiated and agreed before the appointment of the administrator. 

A typical pre-pack sale of the business and assets of a company in administration involves these steps:

• The insolvent company’s directors recognise that the company has no reasonable prospect of avoiding a formal insolvency process such as administration or liquidation.
• The company’s directors take advice from a licensed insolvency practitioner and a pre-pack administration sale is identified as a viable option.
• The insolvency practitioner assisting the company’s directors plans and oversees the accelerated sale process, to include establishing the realisable value of the company’s business and assets.
• Offers are received for the company’s business and assets to ensure that the best outcome is achieved for the company’s creditors when the pre-pack sale is completed immediately following the appointment of the insolvency practitioner as administrator.
• The relevant parties agree the terms of a sale and purchase agreement for the company’s business and assets, together with any other relevant ancillary documents ahead of the appointment of the administrator.
• Pre-completion undertakings are provided which come into effect as soon as the company is in administration and which allow the sale and purchase of the business and assets to complete immediately upon er the administrator being appointed.
• The appointment of the administrator takes place and the pre-pack sale then completes.

There can be fierce competition to buy the business and assets of an insolvent company. 

However, despite the risks, experienced and well-advised buyers can end up with a viable and profitable business acquired for a reasonable price.  When a business and assets are required rather than shares:

• The buyer can cherry-pick the assets that it wants to buy and leave behind anything that it doesn’t want or need, and which may have caused the original company to become insolvent in the first place (e.g. expensive leasehold premises).
• The business acquired can be financially restructured following the completion of the sale. Save for any required “ransom” payments, most debts of an insolvent company are left behind. 
• The business acquired can also be restructured operationally following the completion of the sale, therefore giving the new business a chance to move forward on day 1 with a new management team and lower costs.

We were instructed to act on behalf of the joint administrators of a company that designed, manufactured and installed custom made luxury play equipment and children’s play areas and which installed specialised decking and boardwalks, as well as provided sawmill services, for clients based worldwide.

We advised and assisted the joint administrators on the pre-packaged administration sale of the business and assets of the company to a connected third-party purchaser on deferred payment terms. 

We acted on behalf of the joint administrators of an umbrella company encompassing ten law practices.  The Solicitors Regulation Authority (SRA) intervened into the company shortly following the appointment of the joint administrators. 

We advised the joint administrators on the pre-packaged administration sale of the business and certain assets of the company to an unconnected third party, which included the transfer of client files and client monies. 

We acted for the joint administrators of a company that provided brokering services between wine buyers (customers who were part of an online members club) and wine suppliers (wine producers and wine merchants) located internationally through an online trading platform.

We advised the joint administrators on the pre-packaged sale of the business and assets of the company to a connected third party and on the security to be provided by the purchasing third party that was required to be granted over the purchaser’s assets in favour of the company and the joint administrators to secure the payment of deferred sale consideration.

We also subsequently advised the joint administrators in relation to the enforcement of the security due to the purchasing third party’s non-payment of the deferred consideration due under the sale and purchase agreement.

We acted on behalf of a creditor in connection with the administration of a commercial property developer.  In particular, we provided advice in relation to an uncompleted property development consisting of student accommodation over which our client had a second ranking legal charge. 

We advised and assisted the client in relation to their position in connection with the sale of the student accommodation via a pre-packaged sale out of administration whereby the student accommodation was sold to a third party.  Our advice and assistance included engaging in correspondence with the joint administrators and their solicitors, the third-party purchaser and other connected third parties and their solicitors.  We also assisted with an application to the Land Registry to protect our client’s position.

We acted for the joint liquidators of a company which provided IT consultancy services in relation to the sale of the assets of the company following its entry into liquidation.