Companies might have a viable underlying business and thriving customer base but still find themselves unable to avoid insolvency because of a bad debt book, mounting creditors or an unforeseeable change of circumstances.

Often, the best way to preserve value in such companies is to sell the underlying business, or part of the company’s assets, whether to an arm’s length third party or to the current owners.

This article will explore the broad background to sales out of administration and the multi-disciplinary approach that we take when guiding clients through these transactions.

Administration sales: The background

Sales out of an administration differ from those out of its better-known counterpart, liquidation, because they are not a ‘fire-sale’ whereby the company is necessarily closed, with its assets sold as soon as possible. Rather, administration was introduced to improve the chance that a struggling company’s business could be rescued.

A company can only be placed into administration if the proposed insolvency practitioner believes that one of three statutory purposes can be achieved. Those purposes are either (i) to rescue the company as a going concern or, only if that cannot be achieved, (ii) to obtain a better result for creditors than would be likely in an immediate liquidation or, only if both of those objectives cannot be achieved, (iii) to distribute assets to one or more secured or preferential creditors.

Rescuing a company in its current form is often not achievable and administrators may conclude that realising the company’s business in its existing form would do better for creditors than a ‘break-up’ sale out of liquidation.

Pre-pack administrations: A summary

One of the most effective tools used by administrators to maximise creditor returns is a pre-packaged sale, or ‘pre-pack’. Here, the company’s business will be marketed, a buyer found, and the terms of a sale agreed before the administrator takes office, with the sale contract signed immediately upon their appointment. Often, this allows a struggling company’s business to avoid any interruption to its trading and limits the reputational damage it might suffer with suppliers from entering insolvent liquidation.

The administration process is flexible and it might well be that the best strategy for a particular company is not to sell its assets immediately. A company’s contracts do not necessarily end when administrators are appointed and, when taking office, the administrators can choose to adopt specific contracts or even to continue trading the company’s whole business.

In either case, moving an existing business into a new corporate entity has wide-ranging implications for company stakeholders including staff, trade creditors, and the management team. When advising on sales out of administration, we draw on expertise from across the firm to advise on technical issues arising and have invited partners from several of our specialist departments to summarise their key points of consideration in such transactions below.

Corporate: considerations for parties

By their nature, insolvent sales are conducted at speed and with incomplete information. A buyer cannot expect the same level of due diligence or assurances from insolvent sellers as with an ordinary transaction, and will be expected to assume much of the risk. This means it is all the more important to obtain comprehensive, specialist advice on the proposed sale agreement and terms, and our clients benefit from our extensive experience of corporate transactions advising on both sides of insolvent sales.

Having represented buyers and insolvency practitioners on insolvent sales in respect of a wide range of sectors, we can assist our clients in ascertaining ‘the art of the possible’ in respect of the sale and the underlying documents, in particular what (if any) safeguards are available, while helping the client work towards their commercial objectives.

Property: considerations for parties

Where a company’s business is being transferred out of administration, we regularly assist administrators and buyers with negotiating documents to allow the buyer to continue in occupation of the insolvent company’s leasehold premises. Usually, the administrator will grant the buyer a short-term licence to occupy the premises held under the lease, allowing the buyers a short period to enter into urgent negotiations with the landlord. Generally, this allows for a seamless transition to post-completion trading. Care should be taken, however, if there are arrears of rent and/or future rent payments to be made since, depending upon the circumstances, these could rank as an unsecured claim or as an insolvency expense.

Intellectual Property: considerations for parties

An insolvent company’s intellectual property is often a valuable and crucial part of its business. We advise and assist clients on identifying the intellectual property that the insolvent company owns by carrying out appropriate searches, and on the status and transfer of that intellectual property, including both company-owned and licensed rights. We are also responsible for preparing and negotiating assignment deeds as part of the sale both from the insolvent company and from third parties such as directors, shareholders or other third parties who may own intellectual property used by the company.

Data Privacy: considerations for parties

Customer and marketing lists and staff databases will often be important assets of the insolvent company. These assets need to be transferred securely, and appropriate notices given to people on those databases. It is also important that where the buyer of these assets wishes to keep on using this data, for example to send out marketing materials, that it has the necessary permissions in place to do so. Failure to do this properly can lead to significant regulatory fines. We also increasingly find that directors and sometimes staff will make data privacy related requests of the administrator or buyer, and it is important that these are dealt with robustly and in a way that preserves the legal rights of the individuals concerned.

Employment: considerations for parties

Among the most complicated areas of law affecting insolvent sale are the rules around staff transfer. In most cases, where there is a ‘pre-pack’ sale, legislation known as ‘TUPE’ will apply to provide certain protections to employees. Ordinarily, where TUPE applies, the employees who are employed by and assigned to the business being sold are automatically transferred to the buyer of the business, on the same terms and conditions and with full continuity of employment. Rights and obligations relating to those employees also transfer to the buyer. In the case of an administration sale, certain liabilities do not transfer under TUPE, including payments for unpaid wages (up to a statutory cap) which employees are able to claim through the National Insurance Fund. There may also be some flexibility in making changes to terms of employment, which would otherwise not be permitted by TUPE, depending upon the circumstances of the administration.

We will often assist the administrator or buyer in identifying if TUPE applies to the sale and, if so, which employees are assigned to the business being sold, as well as on the process to be followed. Often, we will assist administrators to ensure compliance with the rules governing the information to which staff of an insolvent company are entitled. TUPE provides that affected employees are informed and, in some circumstances, consulted about the transfer and any measures the buyer envisages taking post-transfer (through employee representatives if the transfer affects a certain number of employees).

In turn, the buyer will need comprehensive advice to understand precisely which staff, and what liabilities, they will take on following the sale, and the rules restricting the dismissal of such staff, or the change of their employment terms, in connection with the proposed transaction. There are often time constraints in an administration sale and, in many cases, it is not possible for the administrator or the insolvent business to provide the buyer with information about the transferring employees, known as the “employee liability information” within the 28 day timeframe set out in TUPE. These risks are generally reflected in the purchase price and we can provide specialist advice on the employee provisions in the proposed sale agreement in terms of the allocation of liabilities in respect of the employees.

Immigration: considerations for parties

When migrant workers make up part of the insolvent company’s workforce, immigration compliance becomes critical. The Sponsor Licence regime is complex and closely monitored by the Home Office. We regularly advise Sponsor Licence holders in navigating the complex landscape of regulatory requirements, including assisting with the full process of obtaining a new Sponsor Licence and transferring the sponsorship of existing sponsored staff, to allow the business to continue in its current form. We also guide Directors and key personnel through essential compliance steps, providing clear and practical advice that safeguards both the business and its workforce.

How can Edwin Coe help?

Sales out of administration are often nuanced and company-specific, with each business facing unique challenges. This is why it is essential to receive bespoke and specialist advice with effective strategies to address each potential issue as it arises.

As a full-service law firm, Edwin Coe is well equipped to tackle such challenges. Our Restructuring & Insolvency team regularly collaborate with the firm’s other departments to provide our clients with the best possible service and the necessary expertise from every angle.

If you require specialist insolvency advice, please contact a member of our Restructuring & Insolvency team. We are here to help.

Read more entries from this series:

The Administration Series: Factors Affecting the Ebb and Flow of Administrations

The Administration Series: The Rise of the Pre-Pack

The Administration Series: A Short History of Administrations

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