8 Aug 2022
17 Oct 2021
With so many businesses going under due to the pandemic, supply chain shortage and labour issues, it may be a good time to bargain hunt for great deals. You might even be hailed as the “white knight” that is saving the business and its job. The first question to ask is, are you buying an asset or the whole business? Are you buying from the "Administrative Receiver", "Receiver", "Administrator", or "Liquidator"?
Many people often get confused about these terms, and it is important to understand what you are buying from before proceeding with the transaction. You will need to distinguish between a company (a legal entity) and its undertaking or business (an asset) and keep this in mind at all times when buying a business or business assets.
Whether you are buying assets or a business is often tax driven by whether the assets of the business are subject to fixed or floating charges (see below). However, there are other advantages of acquiring assets. For example, you are able to be selective about the assets you buy, and you don’t need to take over all the liabilities of the business. This is especially important where the extent of the business liabilities has not been fully extinguished through the administration or receivership or where there is a particularly large contingent liability that cannot be accurately quantified. It may also be important where the target company may prove to be insolvent.
When deciding whether to purchase assets or the whole business, you should bear in mind that there are likely to be added complexities in the transfer of a variety of assets and liabilities. Consents will be required from third parties and, perhaps employees, and some thought will need to be given to what will happen if some of these consents are not obtained either at all or within the required time frame. Because of these difficulties, there will normally be a particular reason why the transfer of an asset is preferred over a business acquisition that is simpler and more straightforward.
Fixed Charge - a fixed charge is a security over an identifiable asset such as property, land, cars, plant and equipment for the purpose of a loan or other form of financing. Examples of fixed charges include mortgages or leases. Any sale of an asset under a fixed charge will be subject to the consent and payment of the creditor (as chargee) first. If the borrower defaults on the loan or financing, the creditors can take over the asset and sell it to pay off the outstanding debt.
Floating Charge - a floating charge is a security over assets that changes from time to time, such as bank accounts, account receivables, inventory or rental income for a purpose of a loan or other form of financing. The borrower can continue to function with a floating charge over its assets without seeking approval from the creditor or paying off the debt first.
A fixed charge over an asset usually takes priority over a floating charge. As the borrower is free to utilise the assets under the floating charge, it also leaves the creditor more exposed. In addition, the floating charge will need to be crystalised, i.e. there has to be defaulted by the borrower before the creditor can take over the assets.
If you are buying business assets and there is a fixed charge over any of the assets, this will have to be released by the creditor. The records of the Companies' House / Registry should be checked to ensure that all charges over the business assets are released. If the creditor has already taken over the business assets upon payment default by the borrower, then this should not be an issue.
If simple floating charges have been granted by the borrower over the Business Assets (for example, to banks to secure overdrafts). Where this is the case, comfort ought to be obtained to the effect that the relevant charges have not crystallised. If a floating charge has crystallised, then the business will not have any power of sale and the assets in question will be beneficially owned by the charge (see below). You will need to determine if the business is under receivership, administration or in liquidation in order to determine the correct course of action.
An administrative Receiver is usually appointed by a bank ("appointor") that lent money to the business. The lender holds a floating charge over the company’s business and assets. The Administrative Receiver has extensive powers to carry on trading and/or sell any asset of the business and act in the interests of the appointor. There is little to prevent the Administrative Receiver from breaking contracts or cherry-picking, and they have few statutory duties.
Almost everything they do is influenced by their desire to make a "Receiver’s profit", i.e. will the transaction result in a net increase in cash. Administrative Receivership, however, saves more jobs and businesses (not companies) than any other rescue process. The UK has abolished the concept of administrative receivership by preventing holders of floating charges from blocking the appointment of an administrator.
The receiver is appointed either under an express or an implied term providing such a power in a debenture (document acknowledging/creating debt such as bonds). These receivers have only so much power as is granted in the debenture, and therefore it is essential to consult the debenture to ascertain their powers.
In the example of China Evergrande, there are certain limitations placed on the bondholders in appointing a Receiver (1) the bondholder has previously given the Trustee written notice of a continuing Event of Default; (2) the bondholders of at least 25% in aggregate principal amount of outstanding Notes make a written request; (3) such bondholders offer the Trustee indemnity and/or security satisfactory to the Trustee against any costs, liability or expense to be incurred; (4) the Trustee does not comply with the request within 60 days after written request; and (5) during such 60-day period, the majority bondholders do not give any inconsistent request.
The administrator is different from an Administrative Receiver in that it is appointed by the court and not the creditors. The UK now allows administrators to be appointed out of court by the holder of a qualifying floating charge or the directors in certain circumstances.
The Administrator takes over the running of the company, displaces the directors and within three months must put proposals to the creditors for salvaging whatever can be salvaged from the company or proposing a scheme of arrangement/company voluntary arrangement. Since an administrator is court-appointed it cannot act in a partisan manner in favour of appointing creditors but must instead act in the interest of all creditors.
Administrators have extensive powers to manage a business and/or sell assets. During an administration, there is a moratorium on litigation and security enforcement against the company and its property. This is similar to the concept of Chapter 11 in the US, whereby a debtor company voluntarily files a petition with a bankruptcy court, accompanied by: (i) a list of creditors; and (ii) a summary of assets and liabilities.
By filing for administration, this gives the directors ‘breathing space’ free of creditor pressure to try to put a rescue plan together. The main objective of the administration is rescuing the company as a going concern. Only if that primary objective cannot be achieved may the administrator then break up or sell the whole of the business or realise property in order to make a distribution to secured or preferential creditors.
A liquidator is appointed by either the court or the shareholders and/or creditors to wind up a company's affairs. A Liquidator rarely sells the business as a going concern, and it is more likely to sell business assets under liquidation.
With a few exceptions, the only people who can take on these roles are Insolvency Practitioners ("IPs"). IPs are often accountants or solicitors but do not necessarily have to be. It is a separate licencing regime.
Buying a business from a receiver is different to any other kind of commercial negotiation. The receiver realises as much as possible. There is always the danger that a Receiver will accept a higher bid right up to the signing of a contract. Time is of the essence because the value of the business is decreasing with each hour of uncertainty.
The receivers' lawyers will prepare the first draft of the receivers' contract and will appear to be giving nothing whilst undertakings, indemnities and obligations will be expected of the buyer.
Since the receivers' contract will be on a caveat emptor basis, the best way for the client to protect itself is to undertake as much due diligence as possible in the limited time available, including title investigations of valuable properties.
The seller of the business will almost always be the company in receivership. The Receiver is only a party to the contract to receive the protection from the disclaimers that will be asked for in the contract.
The Receiver can only sell such title as it may have, if any, because the Receiver can never be sure what the company owns. The Price should take into consideration all the uncertainty and that some of the company's liabilities may land on the buyer. e.g. employee claims, continuing contracts and/or contracts that the buyer wants to maintain.
You or your lawyer should check the following before buying the business from the Receiver:
Covenants given by the company are worthless because if not fulfilled, the buyer will have a claim in damages against the insolvent company. If there are important obligations they should be discharged as conditions precedent. Where this is not possible in exceptional cases, the receiver may personally be prepared to undertake certain obligations.
A Receiver will not offer any warranties or title covenants and will initially refuse to concede any that are requested. However, it may be possible to extract warranties regarding the validity of the appointment of the receiver and that certain acts have or have been done.
The agreement should provide that, on completion, the acquired assets will be released from the appointor and prior charges. If this cannot be arranged at the time of completion then the receiver or his lawyers should give an unqualified undertaking to obtain such releases within a short time.
You should watch out for the following:-
Some questions you should ask yourself before buying a business from the Receiver:-
When an Administrator is appointed there is a moratorium that prevents actions from being taken against the company or its property. The effect of this is to allow the Administrator a little time to run the affairs of the company to effect a sale of the business as a going concern. Often, therefore, there is more time for due diligence. Also, approval of the court/creditors is usually required to protect the position of the buyer and the administrator, and this takes a little time.
An Administrator is, however, unlikely to be able to give many more covenants and warranties than a receiver and may be less likely to do so because it has a limited statutory indemnity from the assets and has no appointor to indemnify him.
The validity of the Administrators' appointment can be checked by obtaining copies of the petition and order of appointment.
Most purchases from Liquidators are of specific assets only because of the lapse of time between insolvency and the appointment of a liquidator.
If the company is wound up by the court then any disposal of the assets may require the approval of the court.
A Liquidator has no obligation to provide any assurances as to the provenance of assets and therefore is unlikely to provide any undertakings whatsoever. So buyer beware (caveat emptor)!
When buying a business or its assets in distress, always consider whether it is necessary to buy the business as a going concern or if is it easier to just cherry-pick the assets?
Generally, the Administrator will try to save the business and its jobs as much as possible and sell the business as a going concern. On the contrary, the Liquidator is there to dissolve and close down the company and will generally sell specific business assets. A Receiver, on the other hand, will try and sell to make a “Receiver’s Profit”, – i.e. to generate enough cash flow to pay off the debtholders who appointed the Receiver.
Who you are dealing with and what you are buying will also have a great impact on the assurance or covenants you are likely to get from the seller. The general rule is to do your own due diligence – happy bargain hunting, good luck and buyer beware!
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