Buying a business from an administrator or receiver

You have been looking for opportunities to buy a business that compliments your existing business. It could be a competitor, someone in your supply chain or a business that adds value to your existing client base. You are aware of a potential target that is in financial distress. Do you wait and make a low offer when an administrator has been appointed or when a bank has appointed a receiver?

Like any Management Buy-Out or MBO's, a buy-out from a receiver will include the setting up of a purchasing company ("Newco") but there will be a number of significant differences from a normal buy-out.

Administrators and receivers are normally under great pressure to conclude a deal as soon as possible. The fundamental rule is to focus on making the deal work rather than completing a normal deal process involving the negotiation of heads of terms, a lengthy legal and financial due diligence process before negotiating complex legal documentation. This is particularly true when they are running a business as a going concern pending a sale. Key employees may exit and customers may move their account elsewhere.

As time is of the essence you will have to take a commercial view on many aspects of the deal which would ordinarily be dealt with in the legal documentation. There are certain aspects that your lawyer will be able to check (title to property, employee terms and conditions, whether any of the assets are subject to a charge) but the administrator or receiver are not the business owners but third party sales agents. As such they will not accept personal responsibility for anything and will not guarantee legal title to the assets. Normal contractual provisions such as warranties and indemnities and completion accounts (all of which would otherwise give rise to a post-completion price adjustment in the event of an unforeseen risk arising) will not be given and so this should be reflected in the price you offer. As a rule of thumb then the business is sold "as seen."

In terms of structuring the deal a buy-out should therefore involve the acquisition of the underlying assets and goodwill of the company rather than the shares in the company itself. This is because the acquisition of a company would mean Newco acquiring that company subject to all its historical liabilities whether or not known to the buy-out team. An asset purchase should involve acquiring only specifically identified assets and liabilities.

Given the timescales, raising finance for the purchase may also be difficult. Normal fundraising or venture capital finance has been more difficult to obtain during the recession so buy-out teams have had to be more innovative. Invoice discounting companies and banks providing asset-backed lending have moved into the buy-out market in recent years which may provide a useful source of funds. Members of the buy-out team may also be asked to put their own funds into the deal as evidence of their commitment.

The stock and assets of the business in administration or receivership need careful consideration. Many suppliers incorporate "retention of title" clauses in their terms and conditions of supply, the effect of which if properly incorporated, is for the supplier to retain title to the goods until payment has been received. The buy-out team may well find the supplier or another secured creditor asserting title to an asset which the administrator has purported to sell to Newco. In these circumstances NEWCO may be bound to return the goods and indemnify the administrator or receiver against any claims that have been made against them.

These are just a few of the issues that may arise on a buy-out from an administrator or receiver. Whilst there can be sound business reasons for buying an insolvent business it is vital that the buy-out teams are aware of the risks that the process involves and take appropriate advice from a suitably qualified expert.

For further information, please do not hesitate to contact the team at ORJ Solicitors, Lorraine Smith can be reached on 01785 275380 or email Lorraine.smith@orj.co.uk or visit our corporate webpage at www.orj.co.uk/corporate.php

Model Articles - Companies act 2006

Under the companies Act 1985 specimen articles of association were provided in the form of "Table A." The Companies Act 2006 provides a set of "model Articles" for companies.

Companies formed after 1 October 2009 will, in the absence of specifically tailored articles, be formed by reference to the Model Articles rather than Table A. Companies formed before1 October 2009 can (whilst there is no legal obligation to do so) choose to adopt some or all of the Model Articles.

Companies may wish to review, update and amend their articles of association in light of the 2006 Act and the Model Articles as the changes made under the 2006 Act attempted to remove much of the "red tape" for directors of OMB and SME companies.

For example the 2006 Act removed the concept of an authorised share capital in order to provide more flexibility for directors to issue shares.

In general the 2006 Act proceeded on the basis that a company can do various things unless a specific article prevents it from doing so. Consequently companies may wish to consider whether to add certain restrictions on powers which the directors will not otherwise have.

For more information and to contact us with regards to your company's articles, and that they are inline with the business needs of your company, go to www.orj.co.uk/corporate.php or call us on 01785 223440.

5 Top Tips For Residential Landlords - ORJ Solicitors

Being a landlord in these uncertain times can carry enough risk without falling foul of technicalities that can befall the unsuspecting Landlord when they seek to obtain possession of their property.

Here are my Top tips for landlords some may appear obvious but it is common for landlords to fall into these traps;

 

1. This sounds obvious, but always ensure you have a written tenancy agreement. This clarifies the landlord and tenants responsibilities to each other and provided it is drafted properly engages legislation that is designed to make it quicker for a landlord to gain possession of their property when faced with a defaulting tenant. 

2. If you are taking a rent deposit, please remember to place this in an appropriate rent deposit scheme. Not only are you unable to start the process of obtaining possession until this is done but you avoid the risk of being liable to pay the tenant damages for failure to do so.

3. Always make sure that you serve the correct notice and that it is valid. On numerous occasions I have been instructed by clients after they have served the incorrect notice themselves and have been burnt when their possession claim has been dismissed for this.

4. Following on from 3. Make sure the dates are correct in the notice. Failure to do so will result in the claim being dismissed and a fresh notice having to be served, effectively starting again from scratch. Such an mistake can result in severe delays to obtaining possession. If the tenant has had legal representation, a dismissal of the possession claim can also result in a costs order against you!

 

5. Whatever you do and no matter how frustrated you get faced with a non paying or persistent late paying tenant, do not take matters into you own hands and kick the tenants out. This can result in a claim for substantial damages by the tenant against you for unlawful eviction. Such damages can be high so as to punish the landlord for the unlawful behaviour and to compensate for the distress caused to the tenant. 

6. Bonus time! If in doubt consult your solicitor to obtain the appropriate advice that is likely to save you time, money and take the worry out of the process. 

 If you are a Landlord and considering action, perhaps you have concerns with rent arrears, repossession, disrepair or breach of covenant, please feel free to contact me on david.edwards@orj.co.uk or call 01785 275 365.