As the saying goes, one man’s loss is another man’s gain, and this applies even during a recession. However unfortunate it may be, the fact is that there will be an increasing number of insolvent businesses up for sale at knock-down prices over the coming months. And now is a particularly difficult time for struggling businesses, as quarterly rents fall due in late September and inability to pay these rents will force many businesses under.

If you have the funds to buy, and you can find a business for sale that fits with what you want, the chances are you will get a bargain. Forced sale prices are always much lower than normal as the vendor has run out of options – they have no choice but to sell to raise money to pay off creditors.

However, if you have never bought an insolvent business before and you are not familiar with the process, there are some key issues you need to be aware of. The process is totally different from a normal business acquisition, where there can be detailed due diligence, long and detailed negotiation and significant legal protection for the buyer in case the position of the target business turns out to be less than what was promised by the balance sheet.

Dealing with the administrator
An insolvent business will normally be offered for sale by its administrator who will have been appointed by the bank (or by the directors without objection from the bank) to get the best price he can, to raise funds to repay the bank and pass any surplus on to unsecured creditors. The administrator will be looking for a quick sale as he will want to avoid the costs of continued trading. He will therefore go with the buyer who has the funds to do the deal and can move quickly – if you are in that position you will have a strong negotiating hand when it comes to price.

The administrator will not accept any personal liability and is unlikely to respond in a meaningful way to any due diligence questions you may have as a potential buyer. He may give you access to the information he has, but you will have to form your own view as he will not be able to confirm if it is complete or accurate.

So, with limited information available and no comeback against the seller should things turn sour, you assume a much greater risk than normal and this is of course reflected in the greatly reduced price. 

The administrator will not confirm the assets the insolvent company is selling are in its possesion. He will sell ‘such right, title and interest’ as the company has.

Goods in stock may be covered by retention of the title claims and belong to suppliers, so you may have to return them or pay for them. If assets are subject to lease or hire-purchase agreements, the lessor may reclaim them or require you to pay unpaid rent as the price for keeping them.

The position with employees will need to be carefully considered since they are likely to be automatically transferred to you under the TUPE regulations on their existing terms of employment. Ascertaining whether or not they have been paid up to date is therefore important. Any dismissals need to be very carefully handled because, if not, an expensive claim for unfair dismissal can result.

If you want to trade from your new business’s premises, you may have to take the risk that the landlord will be willing to let you stay – although in today’s climate he may well be happy just to have a paying tenant. An insolvent company is not free to transfer its lease to a purchaser and in these situations, there is rarely the time to get the landlord’s consent before you move in.

So, as mentioned, you take more of a risk in buying an insolvent business, since there will be no comeback on the seller, but this risk is balanced by the much lower price you will be paying. However, you should still take legal advice to ensure that the matter is properly handled and that ownership of the business is transferred to you.

David Ashplant is a partner at law firm Lester Aldridge