4 considerations when buying assets from liquidators

We recently advised a local charity (Charity) on the purchase of the business and assets of a complementary Community Interest Company (CIC) in liquidation. 

The CIC had created and was running an app for special educational needs. The Charity considered that it could continue the app for its users and looked to purchase the CIC's intellectual property (IP) and goodwill from its liquidators. 

Sarah Farish, associate in Muckle’s banking and restructuring team, worked closely with Tom Justice, an associate in Muckle’s commercial team. They advised the Charity on the transfer of the CIC’s intellectual property, goodwill and customer database in the insolvency situation. 

This saw Sarah and the team negotiating and effectively managing the deal, to ensure the Charity’s acquisition was problem-free for both the Charity and CIC’s user bases and ensuring the actual commercial transfer of the business, confidential information and data that was purchased was protected.  

With this case in mind, Sarah discusses her top 4 things to consider for buyers purchasing out of a liquidation. 

1. This isn’t a usual deal – the insolvency regime statute and rules will apply 

Whilst “pre-pack” administrations often dominate the headlines in respect of sales in insolvency situations, assets can be negotiated and purchased from office holders after their appointment. 

Whilst the deal itself is commercial, the Insolvency Act 1986 and Insolvency Rules 2016 will apply. 

2. There will be minimal warranties given 

A usual corporate sale can bring about reams of (important!) warranties and covenants for all parties involved, due diligence and data rooms to be reviewed to allow a buyer to satisfy itself that the price being paid matches the business and assets being purchased: Are they suitable, worth the price being paid and free from any issues (defects, claims, title issues etc)? 

However, if, like the Charity, you are purchasing out of an insolvency situation, the office holders will be party selling the assets both on behalf of the business and in their own capacity as office holders.

The office holders step into the shoes of the directors on the first day after the appointment and are only armed with the information in front of them.

As such, sales are usually entered into with minimal warranties or indemnities. In fact, the office holders seek to request indemnities from the buyer in respect of potential creditor clawbacks.  

This places a greater risk on the buyer than a usual commercial deal as they are often required to assess the suitability of the assets at speed without being able to rely on the seller’s knowledge of the same. This is usually reflected in the price paid by purchasers in insolvent situations. 

3. The closer to the insolvency, the riskier the purchase

Where a purchaser is interested in buying assets out of a distressed company, it can sometimes be safer to wait for the business to enter an insolvency process and purchase assets from the office holders directly. 

Where purchases take place just prior to the business enters into an insolvency process, they can be open to challenge by office holders after their appointment. 

Office holders are under a duty to investigate matters leading up to the insolvency and this can include reviewing transactions to ensure that they were made at fair value, at arm’s length and reasonable terms and not, for example, in preference of one creditor over another. 

4. It’s crucial to seek legal advice

As always, the earlier you seek legal advice, the smoother a transaction will be. In insolvency situations including pre-packs, it is usual that a potential purchaser will be aware of the distressed situations. 

There are a number of things to consider including the timing, type and risks of purchasing out of a distressed or insolvent situation. 

Our restructuring team has experience in providing specialist advice and assistance to purchasers across all our sectors. 

However, this recent matter, combined with assistance from our exceptional charities team, means that our restructuring team can advise and assist charitable organisations of all shapes and sizes, their office holders or those looking to purchase assets from distressed situations.  

If you have any queries on the topics raised in this article, or on insolvency law in general, please contact Sarah Farish using [email protected] or 0191 211 7898.