Buying assets from an insolvent business

Purchasing assets from insolvent businesses can present significant commercial opportunities, often at attractive valuations. However, these transactions come with unique risks that require careful consideration and strategic mitigation.

Understanding who has authority to sell and what approvals they require is essential before entering negotiations. In the UK, it is generally safer to wait until a liquidator, administrator, or receiver is formally appointed before buying assets from a potentially insolvent business.

Once an insolvency practitioner (IP), a liquidator, administrator, or receiver, are appointed, they are legally authorised to sell company assets. This gives you clear title to what you buy, and reduces the risk of the sale being challenged later.

Key Points Summary

1. Expect minimal legal protection when buying from insolvent businesses - sellers typically offer few or no warranties and guarantees, making thorough investigation essential before purchase.

2. Ownership problems are common - assets may have hidden claims against them, be subject to finance agreements, or have ownership disputes that require careful checking and legal safeguards.

3. Courts can cancel the sale after completion - if the price was too low or the timing suspicious, a court might later reverse the transaction, requiring proper valuation and transparent process.

4. You may inherit employees and their rights automatically - even in "asset-only" purchases, employment law (TUPE) may transfer staff and all related liabilities to you without your consent.

5. Completing the purchase brings practical challenges - including securing third-party permissions, maintaining business continuity, and creating effective handover arrangements.

Types of Insolvency Processes

When purchasing assets from an insolvent business, the specific insolvency process will impact the transaction's structure, risks, and required approvals:

• Administration - most common route for business asset sales. The administrator acts as the company's agent and can sell assets without court approval in most cases. Pre-pack sales (arranged before appointment) require compliance with SIP 16 guidelines.

• Liquidation - the liquidator has statutory power to sell assets but may require court approval in certain circumstances. The process is typically more formal than administration.

• Company Voluntary Arrangement (CVA) - existing management usually remains in control. Any asset sales must comply with the approved CVA terms.

• Receivership - a receiver acts for a specific secured creditor and can only sell assets subject to that security, potentially resulting in fragmented sales.

Key Risks

• Limited Warranties and Indemnities - Insolvency practitioners rarely provide meaningful warranties or indemnities, leaving buyers exposed to undisclosed problems. To protect yourself, conduct thorough due diligence on essential assets, consider specialised insurance for key risks, adjust your purchase price to reflect the increased uncertainty, and document any specific representations you're relying on. Escrow arrangements can provide some protection for a portion of the purchase price if issues emerge later.

• Title Issues and Encumbrances - For high-value assets, consider title insurance and appropriate novation agreements. Court validation orders can provide additional protection against subsequent challenges.

• Transaction Validity Risks - Courts can set aside sales from insolvent companies if they appear to be preferences or transactions at undervalue.

• Employment Issues (TUPE) - staff and staff related liabilities can end up being transferred to the buyer automatically, even in asset-only purchases. Assess early whether TUPE applies and factor employee costs into your purchase price.

• Customer and Supplier Relationships - existing contracts which may be part of assets acquired, often terminate automatically on insolvency or require consent for transfer, while business relationships may have deteriorated. Engage early with key customers and suppliers, seek novation of critical contracts, and implement a clear communications strategy. Consider retention incentives for relationship holders and staged payments linked to customer retention to manage these risks effectively.

• Intellectual Property Complications - IP ownership is often unclear in insolvency, with licensing arrangements that may terminate automatically. Conduct detailed IP audits, secure proper assignments with clear chain of title, and review license agreements for termination provisions. Consider source code escrow for software assets, register security interests, and implement transitional licensing arrangements where needed to ensure business continuity.

Planning the Purchase

• Balance need for expedited transactions with proper risk management

• Due Diligence Checks - before committing to a purchase, conduct thorough due diligence including review of financial statements, contracts, employee obligations, and ongoing disputes. Check for floating and fixed charges at Companies House.

• Dealing with Secured Creditors - establish clear title to assets and possible discharge of security interests before completing the purchase. Consider buying assets from secured creditors rather than the company itself to simplify the transaction.

• Consider phased completion for critical assets