As the economy and businesses deal with the challenges and restrictions associated with managing COVID-19, some businesses will survive, while inevitably others will not. The distress and failure of businesses will create buying opportunities for those that survive the coming months. If you expect to be looking to take advantage of these potential buying opportunities, it is important to understand the ground rules for transacting with an administrator or a receiver & manager.
There have been a number of amendments to the insolvency provisions of the Corporations Act in recent years, including those in direct response to the COVID-19 crisis, the amendments in 2018 to restrict “ipso facto” rights (including termination on the insolvency of a counterparty) and the directors’ “safe harbour” regime introduced in 2017. All these changes are intended to deliver a greater opportunity for financially distressed companies to survive or otherwise undertake an orderly restructure or workout to realise value for all stakeholders. In particular, the ipso facto reforms are intended to give administrators and receivers & managers a better opportunity to maintain financially challenged businesses as a going concern, rather than the doors having to be closed followed by a “fire sale” sale of tangible assets.
Buying opportunities from administrators and receivers & managers are different to your “typical” M&A. Administrators and receivers & managers have personal liability in respect of the businesses they are managing, and therefore are only prepared to transact on “atypical” terms so as to protect against personal liability. You should be mindful of the following when considering participating in an opportunity being offered by an administrator or a receiver & manager:
- These transactions are always structured as business/asset sale transactions. While this means the buyer is not acquiring the insolvent company and its liability for its unpaid debts, it also means there is more to do to complete the transaction. All the assets need to be transferred, all the contracts need to be assigned, all the employees need to resign and take up new employment offers with the buyer, and so on.
- Receivers & managers have a statutory duty to secure the best price that is reasonably obtainable. Generally, this means that they will run an auction process. So as a buyer, you won’t get exclusivity, and you will need to be prepared to invest in your due diligence investigations with the risk that another interested buyer might out-bid you in the process. Administrators generally adopt the same approach.
- Administrators and receivers & managers generally will have been in control of the insolvent business for only a relatively short period. This means that they simply do not have the detailed understanding of the nuances of the business that the displaced management team has, and so the assets are sold on an “as is, where is” basis. Accordingly, administrators and receivers & managers generally are not prepared to give any warranties in relation to the business and its operations. If you seek a full set of warranties, that proposal will almost certainly be rejected, as agreeing to warranties that are not able to be verified by the administrator or receiver & manager puts them at risk of personal liability if the warranties prove to be untrue. This makes undertaking appropriate due diligence even more critical in these transactions, because there is no warranty safety net to protect a buyer if a nasty surprise arises post acquisition.
- Further, even if issues are identified in due diligence, these risks need to be addressed by buyers by way of the price the buyer offers, rather than by the buyer seeking warranties and indemnities from the administrator or receiver & manager. Administrators and receivers & managers will tell buyers “to factor (the risk) into your price”. This can mean that it is easier for trade buyers to be comfortable in these processes, because they are more readily able to assess the risks associated with a business and its operations and the associated financial implications due to their intimate knowledge of the industry the business operates in.
- Ideally, administrators and receivers & managers want to move fast – every day that they are in control of the insolvent company often means a further reduction in the funds available to creditors of that company. So, you need to be decisive, have thought in advance about what risks you are prepared to take and at what price, and ideally have your deal funding arrangements already in place.
- Administrators and receivers & managers also want certainty – there’s no point agreeing to proceed with a buyer who can’t or won’t complete, as that wastes time and likely further destroys value for creditors. So, to maximise your prospects of success, any proposal should be as unconditional as possible so that the administrator or receiver & manager has the greatest amount of certainty that if your proposal is accepted it will subsequently complete.
- To further minimise their risk of personal liability, administrators and receivers & managers will seek a comprehensive regime of acknowledgements, releases, disclaimers and certain indemnities from the buyer. While this is the opposite to what you might be familiar with from the “typical” M&A context, it is effectively a non-negotiable “market practice” requirement of administrators and receivers & managers in the M&A context.
If you have any queries regarding this article, do not hesitate to contact me. The next article in this series will focus on the likely new points of tension between buyers and sellers in M&A in the post COVID-19 era.
Gary Thomas - Managing Principal - Grondal Bruining
Phone: +61 8 6500 4375 | Mobile: +61 414 858 584
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Grondal Bruining is a commercial law and litigation firm with a team of highly experienced, respected lawyers providing specialist advice on significant commercial and corporate matters. We have been recognised in Doyles Guide as a Leading Commercial Litigation and Dispute Resolution Firm in Western Australia. The firm has a focus on power & utilities, oil & gas, resources and other commercial and industrial areas. Our team is renowned for providing outstanding benefits to clients, delivering proactive and professional advice. We are conveniently located in West Perth.
The material in this article is provided only for general information. It does not constitute legal or other advice. Contact Grondal Bruining for advice specific to your circumstances on +61 8 6500 4300.