Buying the assets of an insolvent business from an administrator or liquidator may appear to offer a cost-effective way of acquiring a business. However, there are a number of issues that you should consider carefully before taking the plunge.
Unlike a normal commercial purchase, when a business is insolvent, you will not receive any assurances in respect of the assets you are buying. To protect your investment, it is essential to take legal and financial advice to ensure that you fully understand the implications.
Risks of purchasing an insolvent company’s assets
The insolvency practitioner will not offer any warranties or indemnities in respect of the assets. These are normally offered in respect of information provided about ownership of assets, property and IP and issues such as potential legal disputes and claims.
In the case of a purchase from an administrator, you will usually be required to confirm the following:
- That you understand that no warranties or indemnities are given;
- That you have relied upon your own investigations into the condition of the assets and have had the chance to inspect them;
- That you have taken professional advice regarding the risks.
The seller will make it clear in the agreement that in return, you are receiving the assets for a lower price than normal.
You will be granted only ‘such right, title and interest as the seller has,’ which means that you must make sure that you carry out extensive due diligence into the title of the assets to ensure that the insolvency practitioner has the right to sell them and that ownership can transfer to you.
Issues to investigate before buying assets from an insolvent company
Equipment, machinery and stock
Any assets that are leased or that are subject to retention of title by a third party cannot be transferred to a buyer. The sale and purchase agreement will specify that you will not acquire rights to these assets and will detail how items that are subject to retention of title are to be dealt with.
You will be required to indemnify the administrator against any costs or liability in respect of stock subject to a retention of title.
It will be open to you to negotiate a lease of assets from the owner in the usual way.
Similarly, intellectual property may be on licence from a third party and you would need to negotiate a licence yourself as this will not be automatically transferred when you purchase the business assets.
Taking over the lease of commercial premises from an insolvent company will need the consent of the landlord to an assignment. If securing the property is important to the operation of the business, you should ensure that this can be done before going ahead. The administrator and landlord may offer you a licence to occupy until the lease can be assigned.
If you are buying a business as a going concern, then the Transfer of Undertakings (Protection of Employment) Regulations 2006 will apply and you may find yourself liable for the business’s employees. In this event, you are obliged to comply with the regulations in full, including by consulting with employees about the transfer of the business.
This can be an onerous and complex area with large potential for errors to be made, so it is essential to take expert legal advice before going ahead.
At RSW Law, we have wide experience of dealing with asset purchases from administrators. Our advice is practical and we always focus on our clients’ commercial interests.
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