This article was first published in the January 2012 Ireland edition of Accounting and Business magazine.
In the current economic environment, thousands of Irish companies are going into liquidation/receivership. Such situations can represent a unique opportunity for a purchaser to expand his business, or acquire a complementary business, at a knockdown price. Sometimes, depending on the particular market the company is operating in, the situation may give a competitor the opportunity to increase market share by paying a premium for the assets and, thus, preventing the previous management from buying the assets and setting up in competition.
It has been known for competitors to mothball such assets in order to protect their market share. Leaving aside the strategic issues facing potential purchasers, the purpose of this article is to lay out some of the issues facing an insolvency practitioner in disposing of assets and, also, to suggest an action plan for acquiring businesses from receivers.
Disposal of assets
When a company is placed into insolvency proceedings, the officer holder, be they liquidator or receiver, has a duty to, first, protect and, second, achieve maximum realisations for the assets of the company.
At the outset, the liquidator should appoint an independent appraiser to carry out an appraisal of the assets with a view to determining their true value. In many circumstances, the former directors’ estimations of the assets can be dramatically over or under valued.
Subject to finance charge
It may be the situation that some of the assets are subject to a lease or financial charge. In these circumstances, the liquidator should obtain a settlement figure from the leasing company and determine whether there is any equity when comparing the independent valuation and the settlement figures. If there is no equity in the asset, the liquidator will need to immediately hand the asset back to the charge holder. If there is equity, the liquidator will then set about disposing of the asset and then discharge the outstanding lease with the equity forming part of the realisations of the liquidation.
The liquidator has a duty to obtain the maximum value for each individual asset. There are any number of disposal methods and the liquidator should choose the method which best suits the class of asset and the opportunity for maximum realisation. Among these options, the liquidator may:
- Advertise the asset in a national newspaper or a trade journal;
- Sell them through an auctioneer (ideally one who specialises in the type of asset); and/or,
- Sell them to connected parties.
It is important that the liquidator can stand over whatever method of disposal and can demonstrate that maximum realisations were achieved. The duty of the liquidator is to ensure the maximum value of the assets is obtained, but this does not require the liquidator to obtain the maximum value for each individual asset if disposal of a parcel of assets or the assets as a whole will, in aggregate, maximise total realisations.
Selling to connected parties
The obligations on the liquidator in relation to the maximising of realisations of assets do not, in any way, preclude the disposal to connected parties. However, a liquidator is prohibited from disposing of assets by private contract to any person who was an officer of the company in the three-year period prior to its insolvency, unless the liquidator gives 14 days notice to all known creditors.
This requirement is outlined in Section 231(1A) for court liquidations, Section 231(1A) and Section 276 for voluntary liquidations and Section 316A for receiverships. It is the liquidator’s duty to ensure that all transactions are conducted on an arm’s length basis and, as regards the value of any assets, subject to transaction, these must be valued on the basis of a professional appraisal of the assets.
If the appraisal of the value of the assets is not conducted by an independent appraiser, the liquidator should ensure that he or she has conducted all due enquiries as to the value the assets and retains appropriate support documentation in this regard. If the assets are being sold with a professional valuation, the officeholder should consider seeking the views of the committee of inspection, should one be appointed.
Leaving aside the strategic issues facing potential purchasers, the following sets out a suggested action plan for acquiring businesses from receivers. Similar considerations would apply to buying a business from a liquidator.
The purchasers should determine why the company went into receivership. If the company failed because of poor product quality leading to poor sales, then it is likely that there is no inherent viable business. However, if the company failed because of, say, inadequate financing but has a strong brand name in the marketplace then it may be viable.
A party interested in buying the business should assemble an acquisition team, who should be advised by competent solicitors and an appraiser. It is also a very good idea to have an insolvency specialist on the team as he or she can advise on the negotiating strategy to be adopted with the receiver.
Generally speaking, the receiver will sell an asset ‘as is’ and will give no warranties or guarantees. Thus, receivership sales are a case of caveat emptor. The investigation into the business should concentrate on its future prospects. In contracting-type businesses, the receiver may wish to sell the benefit of uncompleted contacts. These require particular due diligence to ensure that they can be completed profitably.
Having completed the investigation and decided to sit at the negotiating table, the potential purchaser will find the form of the final discussions will depend on many factors, including the degree of face-to-face negotiations and the skills of the respective negotiating teams. The experienced receiver will rarely tell you how much he or she is looking for, being well aware that ‘every offer is subject to a counter offer’, and so will ask all interested parties to submit written offers and attempt to improve on these. The receiver may also attempt to generate a bidding war among the potential purchasers, leading to a so-called ‘Dutch auction’ scenario. While the receiver will try and sell the business for the maximum amount possible, he will generally end up selling the business for an amount between its forced-sale value and its going-concern value. The receiver will have received valuations from his appraisers for the assets on these two bases. To illustrate the difference in values, take the recent case of a small Irish engineering company whose book value of plant and machinery was €410,000, going-concern value €228,000 and forced-sale value €104,000. The business was finally sold, after three months’ trading, for an effective price of €182,000.
There are many factors receivers will take into account in selling assets. For example, there may be a rent quarter day coming up and the receiver may wish to have the premises vacated by then. In another recent case, in the space of an afternoon, the contents of a 20,000 sq. ft. carpet warehouse, and the office furniture and equipment in an adjoining building, were sold for only €32,000, as a rather aggressive landlord was organising bailiffs to come round the following day.
Most receivership sales are not done under such duress and, in these circumstances, it is worthwhile maintaining close relationships with the company’s management and the receiver’s staff to determine the level of interest of other purchasers. This information can be used for setting the parameters of the opening bid. The golden rule to remember is that everything is negotiable: the price, payment terms, rents, access to premises post-completion, retention of title claims, commission for the collection of book debts, etc.
The longer the receiver continues to trade, the more likely he or she is to sell the business closer to its forced sale value. This is because the business starts to lose customers due to uncertainty over future supplies and key staff take up positions elsewhere. If there is only one purchaser interested in the business then the opportunity for knocking the price down is greater. However, an experienced receiver should still manage to achieve a good result. In conclusion, receivership/liquidations offer a unique opportunity to buy a business for less than its going concern value.
Tom Murray is a partner with Friel Stafford