“Buyer Beware” is the warning that should be heeded when buying assets from an insolvent company.
Warranties

Unlike a purchase from a solvent company where the buyer can expect the seller to warrant that it owns the assets, that the debts are recoverable, that intellectual property can be exploited or sold without risk of challenge from a third party and where the buyer may bring an action against the seller if any warranty is untrue, the opposite is true in a purchase from an insolvent company.

In an insolvent sale the assets will be sold on the basis of “such right, title and interest as the seller has”.  No warranties as to ownership, functionality or condition of the assets being sold will be given.  In addition there will be an express exclusion of the terms ordinarily implied by statute into sale and purchase contracts, for example that the assets are fit for their purpose or are of satisfactory condition.

The buyer will be expected to acknowledge that it enters into the agreement without reliance on any warranties or representations made by the buyer, its employees, agents or by the Administrator.  The buyer will also have to agree  that the terms and conditions of the agreement are fair and reasonable bearing in mind that:

– it is a sale of an insolvent company in circumstances where it is usual that no warranties, representations and conditions can be given by the seller or the Administrator;

– the buyer has relied solely upon its own opinion and/or professional advice as to the quality, state, condition, description, fitness and suitability of the assets;

– the buyer has agreed to buy the assets “as seen” in their recent state and condition;

– the buyer has been given every opportunity to examine and inspect the assets; and

– the buyer has available to it skilled professional advice and has entered into the agreement for consideration calculated to take into account the risk to it represented by the fact that the exclusions and limitations set out in the agreement will be recognised by the Courts, the seller making clear that it would not have agreed to sell the assets on any other basis, except for a higher consideration.

The Administrator will exclude any personal liability.

Intellectual Property

It will be necessary to identify whether Intellectual Property (IP) rights are necessary in order to continue the business and whether those rights can be transferred to the buyer.  If any IP rights have been used under licence from a third party, that licence may terminate automatically upon insolvency.  If so can equivalent rights be acquired from a third party?
Key contracts and Third Party Assets

In relation to any hire/lease agreements it should not be assumed these will be transferred automatically.  The terms of the agreements will most likely prohibit assignment without consent.  In those circumstances the buyer must negotiate directly with the third party’s provider.  In the terms of the agreement between the seller and the buyer, it is usual for the seller to state that  it shall not object to or hinder any arrangements that the buyer may wish to make with the owner of the  leased assets and shall give such assistance to the buyer as it may reasonably require to enable the buyer to acquire title or continued use.  This usually carries the proviso that if the owner of such items refuses to make available and such items to the buyer then the buyer shall deliver up such items for collection and removal by the owner.  It is therefore imperative that the buyer is able to satisfy the owner of the leased assets that it will be able to service the on-going rental/lease payments, especially given the current climate.  Providers are being far more cautious and are examining deals in detail before agreeing further or continued facilities.  It is advisable that up to date accounts and business plans/budgets/forecasts are available for production and that the buyer is able to demonstrate a good credit history.  It may also be helpful to explain to the leasing company that the buyer taking over the leases will provide continued longer term lease security and therefore it would be in its interests to consent to the assignment/novation.

Employees

Unlike liquidation, the appointment of an Administrator does not terminate any contracts of employment.  Those contracts will continue unless the Administrator elects to terminate them.  The Transfer of Undertakings (Protection of Emploment) Regulations 2006 (the TUPE Regulations) apply in most instances where there is a sale of a business undertaking as a going concern.  If the TUPE Regulations apply:

– all employees assigned to the undertaking will automatically transfer to the buyer on their existing terms and conditions of employment, without a break in the continuity of their employment;
– if an employee is dismissed in connection with the transfer it will be automatically unfair unless the buyer is able to demonstrate that the dismissal was for an economical, technological or organisational reason; and

– there is a duty to consult with duly elected employees’ representatives or recognised trade unions regarding the transfer and failure to do so could lead to an award being made payable to the transferring employees by their new employer.

Retention of Title (ROT)

How parties to a sale/purchase agreement involving an insolvent company deal with ROT stock is dependent upon the structure of the deal.  The parties to the agreement will acknowledge that the buyer acquires no title to ROT stock, and no right to possess or use any ROT stock.  The buyer will be required to undertake that it will not hold itself out as the owner of the ROT stock nor sell or otherwise deal with such stock.

Immediately following completion of the agreement, the buyer will be asked to separate and clearly identify the ROT stock, in so far as is reasonably practicable and at its own expense.

In certain agreements the buyer agrees to accept full responsibility in respect of all or any third party claims against ROT stock and thus the buyer bears the full risk of such claims.  Where this is agreed between parties it is acknowledged that the agreement is entered into, and the price for the stock agreed, upon a specific basis.

In other circumstances the buyer agrees that it shall notify the Administrator in writing as soon as practicable if the buyer receives notification from any supplier that it has a ROT claim.  In this situation usually the Administrator has primary responsibility for dealing with the ROT claims and the buyer usually agrees that it shall not without the prior written consent of the Administrator admit liability or take any other action whatsoever in relation to any such claim.

The buyer is always required to indemnify and keep indemnified the seller and the Administrator against all proceedings, costs, demands and libilities which may arise as a result of ROT claims.

Leasehold Property

If the premises of an insolvent company are leasehold, an assignment of the existing lease will take time and usually requires the consent of the landlord.  Given the time constraints a buyer will usually be granted a Licence to Occupy the premises for either a definitive period or until notice is given by either the Administrator or the landlord.

In the recent case of Golden Acre (Offices)  Ltd v Nortel Networks UK Ltd (In Administration) it was held  that the cost of the rent is an expense of the Administration rather than a liability of the company.  It was also held that the expense incurred is not restricted to the extent that the company in administration used the premises as an asset.  The Court held that the entire rent was payable under the lease as an expense of the Administration as a “necessary disbursement”.  The Court rejected the argument that the company in Administration only occupied a small part of the leased premises and, as the landlord could not make use of the unoccupied part of the premises,  considered it fair that the Administrators should pay for all of it.  This clearly puts landlords in a stronger position in commercial dynamics.  It is understood that the Administrators do not intend to appeal the decision.  Following this decision, Administrators will need to give serious consideration to their need for premises and for how long.  For the company entering Administration the timing needs to be planned around the quarter days to ensure that, where possible, rent payment dates do not fall immediately after the company goes into Administration.  This will allow time to clear the premises which are not going to be used going forward, and also obtain the maximum amount of time in the premises that will be used, before rent is deemed an expense of the Administration at the next quarter day.

Assistance with Collection of the Debts

It may be a term of the agreement that the buyer collects the book debts or other debts due to the seller/and or the Administrator for a period agreed between the parties.  In this circumstance, the buyer may receive a percentage of the debts collected, normally around 5% of the gross amount of all monies collected by the buyer.  The buyer will be required to report on the progress of the debt collection on a basis agreed between the parties.

Minimising Risks

In order to minimise the risks posed when buying from an Administrator a buyer can take the following steps:

– Check that the Administrator has been properly appointed so that the sale cannot later be challenged by the insolvent company’s creditors

– Ask to see the contracts and agreements which will be necessary to maximise the benefit of the business and ascertain whether any of them terminate on insolvency.  Also check the assignment provisions to make sure they are capable of assignment.

– Ask for information on the terms of employment of the staff of the business:

– do written employment contracts exist?
– calculate the cost of employing all the staff and, if planning redundancies, factor in TUPE
– investigate on-going disputes (if any)

– If the premises are leasehold and integral to the business being acquired, begin early negotiations with the landlord in respect of the assignment of the existing lease

– Verify whether any tangible assets are subject to retention of title claims

– Verify IP essential to the continued operation of the business and whether the company owns it.  Check any supplier contracts to determine ownership and whether any licences can be transferred

– Crucially, establish the full extent of liability under finance or lease agreements.  Get copies of the agreements and check the terms and conditions.
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Judith Clark jac@walkerfoster.com

This briefing note is intended as an aide memoiire and guide only and does not constitute definite or specific legal advice.  No responsibility is accepted for actions taken based on the information contained in this note.  If you would like to discuss dealing with Insolvency Practitioners in more detail please contact Judith Clark on the above telephone number.