The sale of an insolvent business is certainly possible, but it’s often a complex undertaking. While it may seem like a viable option for addressing mounting debts, you must approach this decision with caution.
As a director of an insolvent company, you have a statutory duty to act in the best interests of creditors. Selling the business doesn’t absolve you of this responsibility, nor does it erase any previous breaches of duty or misconduct. Moreover, creditors may challenge the sale if they believe it undervalues the company’s assets.
When considering the sale of an insolvent business, you should take into account:
The company’s current financial health
The value of its assets
Potential buyer interest
The impact on creditors
Associated legal risks that could impact you as a director
I recommend you engage with an insolvency practitioner such as ourselves as soon as possible. We can provide expert analysis of your situation, explore potential solutions, and guide you through the process of meeting your legal obligations.
When faced with the challenge of selling an insolvent business, you have two primary options: marketing the business on the open market or pursuing a pre-pack administration. Each approach has its own advantages and considerations.
Marketing an Insolvent Business
Selling an insolvent business on the open market has the potential to yield a higher sale price due to increased competition among buyers. However, this method comes with several challenges:
Open market sales typically take longer, which may not be feasible if your company is facing creditor pressure.
The sale process may become public knowledge, potentially damaging relationships with suppliers and customers.
You must ensure the business can continue trading legally while on the market, which can be difficult when insolvent.
To pursue this option, you’ll need to demonstrate to an insolvency practitioner that there’s sufficient working capital to allow continued trading during the sale process. This can be particularly challenging for businesses already facing financial difficulties.
Pre-pack Administration: A Rapid Sale Approach
Pre-pack administrations have become the most popular method for selling the assets of an insolvent company in the UK[1]Trusted Source – GOV.UK – Pre-pack Sales in Administration. This process involves arranging the sale of a company’s business or assets (or both) before appointing an administrator, who executes the sale immediately upon their appointment.
The benefits of a pre-pack sale include:
Speed: Pre-packs enable a quick and relatively smooth transfer of the business to a new owner, minimising the erosion of confidence among the company’s stakeholders, such as customers and employees.
Job preservation: Pre-packs often save more jobs compared to a traditional administration process that attempts to continue trading the business pending a later sale.
Lack of alternatives: In many cases, there is little other choice if there is no funding available to allow administrators to trade the business before a sale transaction.
However, pre-packs have also faced criticism for:
Lack of transparency and accountability.
Potential failure to maximise returns for unsecured creditors.
It is crucial to note that directors must not dispose of company assets at an undervalued price, as this could lead to personal liability claims.
Selling a Business in Liquidation
When a company enters liquidation, it is no longer possible to sell the business as a going concern. Instead, the appointed liquidator takes control of the process and is responsible for independently valuing and selling the company’s individual assets to repay creditors.
Potential buyers, including competitors, industry investors, or other interested parties, can inspect the assets and make offers. The liquidator will review these offers and negotiate with buyers to achieve the best possible price for each asset. In some cases, assets may be sold individually, while in others, they may be grouped together as a package to attract buyers and maximise returns.
Directors’ Duties When Selling an Insolvent Company
When selling an insolvent company, directors face specific legal obligations that prioritize creditors’ interests. These duties include:
Obtaining the best price reasonably achievable for company assets
Ensuring independent, professional asset valuation
Conducting a transparent sale process
Avoiding unfair preference to certain creditors
Acting swiftly once insolvency is apparent
Maintaining detailed records of all decisions
The case of Philips v Brewin Dolphin Bell Lawrie Limited (2001) BCC 864 is a useful illustration of where this can go wrong[2]Trusted Source – Wikipedia – Phillips v Brewin Dolphin Bell Lawrie, [2001] UKHL 2, (2001) BCC 864. In this case, the liquidator of A.J. Bekhor & Company (AJB), an insolvent stockbroking firm, challenged the sale to Brewin Dolphin. The liquidator argued that the sale price was significantly undervalued. The House of Lords found in favour of the liquidator, establishing that:
Directors must take a realistic and commercial approach to asset valuation
Transactions involving insolvent companies face rigorous scrutiny
The duty to obtain the best price is particularly acute in insolvency situations
Pre-Packs are the Most Common Way to Sell the Assets of an Insolvent Company
If you would like more information about how a pre-pack administration can help you achieve the best solution for you and your business, speak to one of our specialists by calling 0800 074 6757 or emailing: info@companydebt.com today.
FAQs
What are the key differences between selling an insolvent business through a pre-pack administration and a traditional administration?
A pre-pack administration involves arranging the sale of the business or assets before the appointment of an administrator, who then executes the sale immediately upon their appointment. This process is often quicker and more discreet than a traditional administration, where the administrator trades the business for a period before seeking a buyer.
How do insolvency practitioners balance the need for a quick sale with their duty to obtain the best price reasonably obtainable?
Insolvency practitioners have a statutory duty to obtain the best price reasonably obtainable for the assets of an insolvent company. However, they must also consider the potential deterioration of the business’s value if the sale process is prolonged. To strike this balance, insolvency practitioners will often set a limited timeframe for the sale process and engage in targeted marketing to attract serious buyers. They may also consider delaying the sale if they believe doing so will result in a better outcome for creditors.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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