Purchasing businesses out of administration

Transactions to acquire businesses out of administration have several features that make them distinct from typical M&A deals and the buyer will generally need to accept a higher level of risk in such circumstances. However, such risk is typically reflected in a significantly lower price than if the seller were solvent.

What is administration?

Administration is a form of collective insolvency procedure pursuant to which one or more insolvency practitioners are appointed as the company’s administrators, in order to manage its affairs, business and property with a view to achieving one of the three statutory objectives set out in the Insolvency Act 1986:

  • rescuing the company as a going concern;
  • if that is not possible, achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up; or

In practice, however, administrators are rarely able to achieve the first of these objectives, so swiftly move on to the second or third objective. They usually achieve these objectives by selling the company’s business and assets.

What is an administrator?

The administrators take over the control of the company's business and assets from the company's directors in order to achieve one of the statutory objectives discussed above. An administrator acts as the company’s agent, and has wide powers to trade the company and deal with its assets.

Buyer beware

There are several factors that make transactions involving the purchase of an insolvent company’s business and assets distinct from typical private M&A transactions, both in terms of the process and the deal terms.

Instead of being a share sale, the transaction will usually be structured as a business and asset sale, with the insolvent company as the seller. The company will be acting by its administrators, rather than its directors, and the administrators will be under a duty to take reasonable steps to obtain the best price reasonably obtainable in the circumstances. Time will also be of the essence – the longer the business remains in the hands of the administrators, the greater the risk that the value of its assets will deteriorate.

In general, buyers must accept that they will incur more risk and enjoy less protection (both practical and contractual) than they would in a typical private M&A transaction. The administrators are likely to have very little background knowledge of the business, and as a result the due diligence exercise may be extremely limited and the buyer’s warranty protection under the Business Purchase Agreement (BPA) will be negligible. There will also be no recourse to the administrators, who instead will often expect indemnities from the buyer in respect of certain of the assets being sold. Against this, however, the risk that the buyer is taking is likely to be represented in the price it pays for the assets, which can often be significantly lower than if the seller were solvent.

This note covers the key risks that prospective buyers face when buying companies from administrators and how those risks can be mitigated.