Inevitably when we are talking about company rescue or business recovery, then a sale of assets will take place while the company is still trading. This could therefore take place within a formal insolvency process, such as when a company is in administration, or it can be as a method of business rescue on a more informal basis in order to avoid a formal insolvency situation. We look at both below.
Sale of assets outside of a formal insolvency process
The sale of assets in order to improve cashflow is inevitably considered as a “distressed” sale, even outside of a formal insolvency process. This is because the company is in a different position at this point then when it is fully profitable and simply wants to off load an asset. It therefore falls between the two positions.
This type of accelerated distressed sale is usually put in place to get a better realisation for the company and creditors and can often increase the chances of a good outcome for the company and reducing the loss of employees along the way.
- in a standard solvent sale, a buyer will usually conduct a significant amount of due diligence and will negotiate representations and warranties around the assets;
- for a company in financial difficulty, then inevitably the sale will want to be accelerated so the luxury of months of negotiation are not possible;
- it is unlikely in the context of a distressed sale that full representations and warranties will be included in the sale of assets. However, this will inevitably be represented in the price agreed.
Unlike a fully solvent sale, a distressed sale will usually require the purchase price to be paid in full on completion rather than for deferred consideration.
Any sale outside a formal insolvency process must be carried out very carefully by the directors to avoid it being challenged in a later insolvency, as a transaction that might be at undervalue or preferential. If a distressed sale is required, then it may be that the company is nearing insolvency and directors will need to put the interests of creditors above those of shareholders. They must always consider whether the company is still solvent. In order to protect themselves they should regularly hold board meetings that are carefully minuted to be able to defend any later challenges to the transaction. Often this sort of sale takes place with competitors using a contract or an auction or inviting sealed bids or offers. Inevitably the company will be looking at confidentiality being a key factor. If the market becomes aware of distressed sales then it may have ramifications on the company in other ways in the reduction of credit supplies or finances from secured lenders.
A sale of a business or assets in administration is often undertaken in order to allow for the company to sell as a going concern to achieve the best price and to hopefully continue the business in some form and save jobs. Often this is achieved by way of a pre-pack administration sale which is negotiated before the administration completes.
An advantage of selling business or assets during administration is that the liquidator is involved in the sale and they will provide no representations or warranties or indemnities and therefore a sale price can be negotiated quickly. The downside of this is that the sale price will obviously be reflective of this and the purchase price will be lower than in a solvent company sale.
Usually the consideration will need to be paid in full at the time of completion which has the benefit of providing much needed cash to a company in administration.
Another advantage of buying assets from an insolvency practitioner is that it is unlikely to be later wound up as a voidable transaction which may happen in the case of a distressed sale by the directors.
It is important that the insolvency practitioner is confident that the assets have been sufficiently marketed under the circumstances so that the best price is provided on the sale. However what marketing can and should take place is very much dependent on the market and the business and assets involved.
There are a variety of ways and structures in which assets of a business that is facing financial issues can be sold as you can see above. Whether it is necessary to put a company into administration or whether it is possible to sell certain assets as a way of increasing cashflow and avoiding insolvency is dependent on the particular circumstances at the time.
If you are considering ways in which to increase cashflow an asset sale may be an option for you, contact our business rescue experts in order to discuss the options that will best suit you.