When an administrator is unable to rescue a company, the assets of the company can be sold, and proceeds distributed to its creditors.
The sale can be organised in one of two ways. The first is a pre-pack sale, where the terms of the sale are negotiated before the company is put into administration, with the administrator signing shortly after appointment. The second is a later administration sale on terms negotiated in the currency of administration, often after a period of post-appointment trading.
With rising interest rates making loans more expensive to repay and administrations more likely, it is vital to be aware of the key issues for companies and creditors in an administration sale.
Our key message is that buyers must do their own due diligence. Creditors and shareholders should accept the possibility of no—or minimal—recovery.
Administration
An administration is a statutory procedure available to an insolvent company. It can be initiated by a company, its directors, or its creditors.
Administrators are licenced insolvency practitioners who are appointed to (in order of preference):
• rescue a company
• achieve a better outcome for creditors than by winding up the company, or
• dispose of the company to make distributions to certain creditors
During the administration, the company benefits from a pause in any legal action against it or its assets without consent of the administrator or the Court.
Pre-packaged sale
A pre-packaged sale is agreed before the company is put into administration and is completed immediately after the administrator has been appointed. The sale can be of assets or shares in subsidiaries or a mixture of both.
This is a common way of restructuring a business whilst also transferring ownership, potentially to a buyer with better funding, market position or simply with an appetite to improve the return from the business. It can also be used to impose a financial restructuring on non-consenting shareholders and/or junior lenders.
The main benefits of a pre-packaged sale are certainty of outcome and avoidance of business disruption arising from the advent of insolvency.
In a pre-pack sale, the valuation of the assets is key, as the administrator must obtain a fair market value on sale.
Later administration sale
The sale may be by way of assets or share disposal. The fundamental legal terms of the sale are the same as in a pre-packaged business sale but this time the administrator has at least been in office for a period, so will have greater visibility in terms of the business. Whilst legal recourse for the buyer will usually remain limited, there should be greater awareness, including of matters such as third-party claims:
• retention of title creditors
• intellectual property rights owned by others that a buyer will want to continue to use
• trading counterparties that have terminated their contracts
• employees who have chosen to leave because of the insolvency.
Creditors
The main categories of creditor are secured, unsecured and preferential, with each containing certain sub-categories.
As the disposal of company assets can only take place subject to the release of some kind of security held over them, secured creditors will exert significant influence in any sale negotiations.
Where distributions are to be made in an administration or liquidation, creditors rank for payment in the following, descending, order of priority:
• creditors with fixed security over specific assets;
• expenses of the insolvency process, including the insolvency practitioner’s fees and any legal or other professional fees;
• certain ‘preferential’ creditors, including employees and the United Kingdom’s tax authority;
• the prescribed part, a ring-fenced fund up to certain limits set aside for unsecured creditors;
• creditors with floating charge security over changeable classes of assets;
• unsecured creditors;
• interest on certain debts incurred during the insolvency process; and
• shareholders.
Claims for unsecured debts rank equally among each other. In practice, it is not unusual in insolvency proceedings for no recoveries to be made by unsecured creditors or shareholders.
Shareholders
Shareholders will usually have no formal duties in an administration. They will also be the last to receive any distributions on a sale or other insolvency estate realisations. However, certain contractual arrangements (such as shareholders’ agreements) may complicate the disposal of assets, and it may be necessary to engage with shareholders.
Peter Wiltshire and Martin Brown are partners in CMS’s Restructuring and Insolvency Team