16th April 2012

Insolvency of a supplier, customer or competitor

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16th April 2012

Insolvency of a supplier, customer or competitor


An opportunity?

The insolvency of a supplier or customer is likely to cost your business, whether in terms of written off bills, wasted expenditure, or the time it takes to source alternative suppliers or replace lost customers.

In most cases, the insolvency of a competitor will create opportunities for your business.  It is an obvious point, however, you could contact the insolvent competitor’s customers to remind them of your offering as an alternative supplier. Does it make sense to buy the insolvent company’s business?  Despite their insolvency, does the insolvent competitor have a strong brand that could be useful to your business?

Would it make sense to buy the business of an insolvent customer or supplier?  Have you been considering moving up or down the supply chain and perhaps this could give you a head start?

We regularly act for buyers of insolvent businesses and each one comes with its own interesting story, with our clients buying for a multitude of reasons.

If you think the commercial reasons stack up, then you may want to approach the Insolvency Practitioner appointed to deal with the insolvent business (they will probably be called the “Administrator” or “Liquidator”) and make an offer “subject to contract”, to buy the business.

Given the circumstances, you should be able to make an offer below what you would expect to pay if the business was solvent and you could pick up the business for a good price. That said, the Administrator will be under a duty to obtain the best price for the business and will be looking for a number of offers from various bidders.  The Administrator may not want to trade the business and will be looking to sell quickly.  If you get to this offer stage, you should involve us to guide you through the purchase.

The Process and Common Pitfalls

An acquisition of a business from an Administrator (or Liquidator) is very different to an acquisition of a business from a solvent seller. The overriding principle is “caveat emptor” or buyer beware.  The Administrator will want a clean break following the sale (they will want to distribute the insolvent company’s assets to its creditors – the sale proceeds will be an asset as well) and will therefore refuse to give any warranties or indemnities to the buyer in respect of the business being purchased. The flip side is that the Administrator will require various indemnities from the buyer in a number of key areas.  You should bear this in mind when making an offer.

Given the lack of warranty and indemnity protection, you should attempt to undertake as much due diligence as possible in relation to the business.  Bear in mind that the Administrator will be pushing for a swift sale (often this will be in the buyer’s interests as well – it should help to preserve business continuity) and therefore due diligence should be focused and relevant.

The sale will be documented in a sale and purchase agreement.  It goes without saying that you should take legal advice on its terms to ensure this reflects the deal and market practice.

In our experience, common problem areas include:

Administrator’s appointment – recent case law has highlighted the need to carefully review the Administrator’s appointment papers to ensure they have been properly appointed.  An invalid appointment may result in a void sale as the Administrator will not have had the authority to sell the business;

  • Security – does the insolvent company have a debenture or legal charge registered against it?  If so, it is important that a deed of release is entered into between the security holder and the insolvent company to release the business and its assets from such security;
  • Employees – The Transfer of Undertakings (Protection of Employment) Regulations 2006 (more commonly known as “TUPE”) requires the buyer to take on all the business’ employees on their current terms.  You will therefore want to know: who are the employees, how much do they get paid are there any ongoing employee disputes?  It would be wise to speak to senior employees to find out if any employees have recently left the business – they may pose a competitive threat;
  • Property – on a solvent business sale you would normally secure occupation of the business property by way of a lease or freehold acquisition.  On an insolvent business purchase there usually is not time to sort this out.  You may not need the premises anyway, or perhaps you only need to occupy for a couple of weeks while relocating the business.  We would normally put in place a “licence to occupy” whilst sorting out a formal lease assignment – this still leaves the buyer with a degree of vulnerability;
  • Contracts – are you interested in any key customer or supplier contracts?  We may be able to arrange formal assignments or novations of these to secure continuity however, in the time allowed, it may only be possible for you to make enquiries of the relevant customers/suppliers to evaluate the likelihood of them continuing to trade with you following the purchase;
  • Leased assets – is any of the equipment on hire purchase?  You will need to be alive to the possibility of vehicles or computer equipment, for example, being repossessed by a finance company.  Usually negotiation with the finance company, together with a cash payment, will allow any relevant agreements to be assigned and the equipment to be retained.

Conclusions

Whilst insolvency is not in itself positive, many clients turn this into an opportunity and have been able to bolt on a new business to their current businesses successfully.  Given the complexity and speed of the sale and purchase process, we would always recommend that you seek legal advice to guide you to the finishing line.

If you would like to speak to one of our Insolvency and Recovery Group about an insolvency scenario or possible purchase from an insolvency practitioner please contact Richard Atcherley or Mike Pavitt.