Insights

Andrew Robins

Published 5 July 2023
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Buying a Business from an Administrator

Part 1

When a company goes into administration, the administrators often try to sell the business and assets. This can represent an interesting opportunity for potential buyers and there are bargains to be had but of course, buying a business from an administrator is not without risk. Therefore, in this first post in the series, we take a closer look at the essential issues you need to have in mind before you contemplate such a purchase.

Understanding administration

Because of the risks involved, it is important to take professional legal and accountancy advice to ensure you understand all risks and to help you achieve the best possible outcome in line with your objectives for buying. This will include taking advice on issues such as guarantees (or lack of), liabilities, employees, pensions, etc.

It’s also important that you understand the difference between administration, receivership, and liquidation. For example, receivers and administrators have different legal responsibilities and objectives. Administrators will be trying to achieve the best result for all creditors whereas receivers will just be trying to achieve the best outcome for their appointing creditor. It will also be necessary to check that the administrator is validly appointed and has the power to negotiate and conclude a sale.

Administrator responsibilities

The administrator’s objectives are set out in the Insolvency Act 1986. The first objective is to rescue the company so that it can continue trading as a going concern.

If that’s not possible, the administrator must aim to achieve a better result for the company’s creditors as a whole than would be likely if the company were put into liquidation. Finally, in the event that this is not achievable, the administrator must try to realise the company’s property to make a distribution to the company’s secured or preferential creditors.

Warranties and indemnities

Business or assets sold by an administrator will be ‘sold as seen’ and no warranties or indemnities are usually provided. The administrator will have limited knowledge and understanding of the business. On the other hand, administrators may want indemnities from you the buyer against certain liabilities that could arise as a result of the sale. Careful negotiation therefore may be necessary.

Due Diligence

As a result of the above, your responsibility as buyer to carry out due diligence will be extra onerous because you are unlikely to have any recourse if things go wrong. Your due diligence will need to include analysis of the business and any risks and may require a visit to the premises, inspection of stock, property, plant and machinery, and other assets, and interviews with key people where possible. You may have limited time in which to carry out your due diligence.  If it later transpires that an asset was sold without good title then this is the purchaser’s responsibility rather than the administrator or the company.

Business or asset sale

A share sale is unlikely, and you will need to be clear whether you wish to buy the business and/or assets or just some of the assets. Most sales of this nature are asset sales but the administrator is likely to want a business sale. Debts owed will usually remain with and be collected by the administrators, but in some circumstances, you may want to make an offer on the debts or negotiate an arrangement for the debts.

Valuations

It is important to get an independent valuation of the business and assets on the basis of both a forced sale and sale as a going concern basis. This will help in negotiating a sale price.

Pre-pack administration sales

A pre-packaged administration (a pre-pack) occurs where negotiations for the sale of a company’s business and assets take place before administration, and the sale occurs when the administrator is appointed or very soon afterwards. Negotiations for often in private in order to avoid damaging rumours about the business. Often, a pre-pack sale is to existing management. It is always important to ensure that a pre-pack process is transparent and conducted at arm’s length. Pre-pack sales come with their own set of issues.

In our next post in his series, we’ll take a closer look at some of the issues involved in buying a business from an administrator, such as dealing with employees, key contracts, premises and intellectual property. However, if you would like any advice about any of the issues raised herein, please get in touch.

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