What facts do directors need to know

First and foremost, there are two obvious recommendations we would make to anybody thinking about buying a failing business:

1) Do your due diligence

2) Take independent legal advice.

We can’t stress this enough. A business that has entered insolvency has suffered severe financial problems, which is also likely to create a host of other problems that you will need to overcome before turning the business around. So with that said, what exactly might you need to consider in advance of the purchase?

Buying a business in administration

Administration is a formal insolvency procedure that offers a temporary relief – a moratorium from legal action –  from creditor pressure giving the business some vital breathing space whilst a plan for the business can be pulled together. In some cases, the best outcome of this process to maximise returns for creditors may in fact be a sale of the business.

Generally, there are two options for the sale – 1) an open sale in which anybody can bid for the business and 2) a prepack sale, which is a closed process, in which a buyer for the business will be established, be they a connected or unconnected party, often before the business’ creditors are aware of the insolvency.

Can you turn an insolvent business around?

In either case, one of the first questions you have to seriously consider is whether you can actually turn the business around. Do you have the resources – cash, time, specialist knowledge, skills etc to effect positive change?

To be able to answer this question accurately, you’ll need to do your research and your due diligence. You’ll need to find out exactly what went wrong in the business, what exactly you will be taking on when you purchase the business – assets and liabilities, where the market currently stands, what damage the business’ reputation has suffered, and have a very strong plan /proposal to take the business forward to make to the administrators when you make your offer.

What will you be buying? TUPE transfers and employees

You need to know exactly what you will be buying. Does your purchase include work in progress and stock? Does it include the company’s employees? This is a crucial point.
When the company enters administration, the Insolvency Practitioner (IP) will take control of the business operations to act in the best interest of the company’s creditors. Legally, the IP has 14 days while they are considering best plans moving forward to decide whether to adopt the employees’ contracts.

Generally, although the IP is not obliged to cover the contracts during this period, in practice it will often mean that employees will be paid for those 14 days whilst plans are drawn together. At the end of this period, however, employees must either be made redundant. If the IP has not already adopted their contracts, they will be automatically adopted at the end of this period.

You need to be fully aware that when the employee contracts are adopted, it means that the employees’ rights will transfer with the company as part of any sale as if there had been no change. They will need to receive formal notice of the transfer and their terms and conditions will also transfer. Their original start dates will still be in effect, their salary, holiday, notice entitlements etc will remain the same.

You cannot contract out of TUPE, so when buying a business out of administration, you should expect TUPE to apply.

Besides adopting the contractual obligations, depending on the company’s course prior to your purchase, you are likely to need to take time to consult and communicate with the company’s employees. They may have been through quite an extended period of uncertainty and doubt and you will need to get them on board with your plans to make a success of the business.

Managing external relationships

It’s likely that prior to entering formal insolvency, the company’s reputation will have deteriorated with a proportion of suppliers and other creditors. You will need to effectively manage those relationships that the business needs to continue moving forward. Some liabilities will be removed as part of the insolvency process.

However, relationships with key suppliers may require time and consideration moving forward. Ensure you have the cash / resources to get the business back on track and be clear about your plans / expectations.

Do your research and clearly identify the reputational problems the company has suffered with its customers. Put a good plan in place to address any such issues and communicate change. For further tips on adding credibility to the sale, our article on this topic can be found here.

Can I buy a company that has been liquidated?

You cannot buy a company that has been liquidated, as the company will no longer exist. However, you can buy the assets – be that stock, premises, the company name, client base, goodwill etc. Your first port of call will be to contact the Insolvency Practitioner dealing with the liquidation.

They will then be able to direct you usually to a third party agent, that will have been instructed to value and organise the sale of the company’s assets.  Be aware that there are strict rules governing the reuse of an insolvent company’s name, so if you are buying the company name, take legal advice on this matter.

In a nutshell, the benefits of buying an insolvent company can be substantial, and much cheaper that purchasing an existing business or starting from scratch. However, it does require significant resources and specialist knowledge.

If you are considering buying an insolvent company, our BusinessRescueExperts will be happy to discuss your plans with you. Alternatively, if you are looking to find an insolvent business to purchase, we will be happy to discuss your requirements and we maintain a database of interested parties as further cases arise.