Buying a business in administration

Recently we have advised a number of clients on the acquisition of business, assets and undertakings from Administrators. We think we may see other clients build and grow through this type of acquisition as the economic landscape looks like we are heading towards a recession which may force many businesses into this type of insolvency.  

Broadly, a business goes into administration when it is insolvent.  Upon the occurrence of administration a qualified Insolvency Practitioner is appointed usually by directors or a charge holder.  An Administrator is appointed by the Court and appointment, the Administrator assumes control and direction of the business.  

Upon Administration a moratorium is put in place, prohibiting creditors from taking legal actions for the recovery of sums due.  It is seen as a powerful tool to help otherwise viable businesses trade through cashflow difficulties.  Quite often, the assets and undertaking of the business are sold by the Administrator to a third party to realise greater sums for creditors than would otherwise be recoverable through a conventional liquidation.  

Acquiring a business and assets through Administration is different from a conventional asset trade purchase and the purpose of this note is to flag some of the more notable issues that one should consider when acquiring a business in this situation. 

1. Price

Quite often any buyer is asked to put forward a best and final offer for the business.  It is important to note that the usual levels of due diligence one might expect from a trade sale will not be available.  It is important therefore that specialist advice is sought in understanding where you should pitch your bid in view of the often limited information available.

2. Title

Any Administrator will have limited knowledge of the day-to-day operation of the business and its assets. Limited or no warranties as to title in respect of the assets are usually given.  It is vital that steps are undertaken to understand what third party assets or what assets maybe subject to ROT claims. If you are unsure, then this needs to be reflected in the best and final price submission.

3. Staff

The law prescribes that on the sale or transfer of an undertaking, employees are entitled to be taken on by that buyer on the same terms as they were employed prior to the acquisition. This is the same with a solvent acquisition of trading assets and business.  However, different rules can apply depending on whether the insolvent event is terminal or non-terminal. It is vital that appropriate legal advice is sought to ensure that any buyer is aware as to the potential implications of unfair dismissal.  

4. Property

In respect of leasehold properties, Administration prohibits a landlord from forfeiting a lease and taking back occupation. In some instances, administrators will assume the liability of the lease and pay the landlord as an administration expense. Often though, the Administrator will provide a buyer with a licence to occupy the premises based on the buyer paying the rent and assuming the liabilities under the lease. Buyers need to be careful, so they are not indemnifying any historic claims, such as breaches of repair and need to have parallel conversations with any existing landlord about their intentions around the property post-acquisition.  

5. Existing securities

It is vital that all third-party charges, such as legal charges and debentures are understood by any buyer and appropriate releases, or discharges are obtained in respect of each of them. Failure to do so could give rise to those assets being clawed back in the event of a crystallization of security – which an Administration is almost certainly going to trigger.  

6. Timings

Purchases through Administration often happen much quicker than in a solvent process this is usually required to preserve the goodwill and continuity of the business operation. Make sure that steps are taken early on to ensure funds are in place to support your proposal in the time specified.  

An opportunity to acquire a business through administration is an exciting opportunity for clients looking to bolt on build their presence.  However, it is important to ensure that the right questions are asked and that the process is understood to prevent overpayment or an assumption of liabilities not envisaged.  

If you would like further information, or have any questions, please do not hesitate to contact our mergers and acquisition legal team.