Purchasing out of administration

Last week I attended one of the numerous pre-Budget seminars organised by accountants within the region. The conversations over refreshments had a number of themes:-

1. The rate of company insolvencies seems to have slowed down (something reflected in the Insolvency Service statistics for the first quarter of 2010, published in May).
    
2. The Emergency Budget measures, and in particular an anticipated rise in VAT to levels predicted at around 20%, are likely to have an adverse impact on those retail businesses which have just about weathered the recession.
    
3. England's performance in the World Cup usually has a significant impact on the retail market (as well as taking everyone's minds off the economic situation).

If Saturday's result is anything to go by, it looks as if any retail boost will be fairly short-lived. It therefore seems like an opportune time to talk briefly about why, as a purchaser of a business out of administration, it is important to seek legal advice.

Anyone who has acquired a business from an insolvency practitioner will know the basis of any such transaction - a knock-down price but no warranty protection. This does not mean, however, that legal advice is unnecessary.

Although administration sale agreements are usually presented on a take it or leave it basis, there is usually scope for negotiation and clarification of certain areas. In particular:-

• A solicitor will be able to review and advise on whether the agreement correctly reflects the assets and liabilities that the buyer expects to acquire or assume. Even the shortest asset purchase agreement can be difficult for a non-lawyer to intepret, and it is crucial that you have a clear understanding of the key sale clauses and asset definitions. Often, for example, you may be under the impression that you are only taking on a list of defined contracts, whereas the agreement could well purport to assign all customer and supplier arrangements.
• You will also want the agreement to make it clear that you are not taking on any liability for pre-completion default by the seller. Whilst an administrator will not agree to indemnify you against any pre-completion liabilities, they will usually concede that you are not expected to assume a positive obligation to discharge the same.
• Another key area is employees. You will (broadly speaking) be obliged under TUPE to assume all of the seller's obligations in relation to individuals who are employed in the relevant undertaking at completion. First drafts of administration sale agreements will, however, often require a purchaser to assume all obligations in relation to individuals who have been employed in the business at any time prior to completion
• some negotiation of this is usually anticipated.

Administration agreements should not therefore be regarded as non-negotiable. Although wholesale redrafting will be unwelcome, one or two key amendments can make a significant difference to the purchaser's position.