Spirit Label Solutions, Lexon, Ashford Colour Press, Gemini Print – just four print firms that have failed in the past 12 months.
According to data from the Insolvency Service, there were 23,872 registered company insolvencies in 2024 – a figure that was 5% down on the 25-year high of 25,163 recorded in 2023.
Of the firms that failed last year, just under 1,600 were administrations.
There were, however, other forms of insolvency declared such as creditors’ voluntary liquidations, compulsory liquidations, company voluntary arrangements and receivership appointments.
It’s the administrations that are the most interesting since they’re a route for failed businesses to stand a chance of resurrection as a going concern. But the process of administration is somewhat tarnished and can leave some with a bad taste in their mouth when debts are written off and firms move to new ownership.
For some, administration presents an opportunity to buy a potentially good firm and/or assets for a fair price, shorn of any debts. But with a hint of caution, those contemplating buying a business out of administration need to understand the risks.
It’s all in the definition
An administration is as Paul Taylor, a partner in Fox Williams, outlines, a procedure under insolvency legislation where a company may be rescued or reorganised or its assets realised under the protection of a statutory moratorium. Notably, he says that “the moratorium means that creditors cannot take or continue actions against the business in trouble. When introduced, it was hoped that it would be the equivalent of Chapter 11 rescues in the US with the original corporate entity being able to be rescued”.
When introduced by the Insolvency Act 1986, the then government hoped it would provide a cheaper and more flexible option for companies in financial difficulties. Unfortunately, Taylor thinks that both these aims have not been realised and so says administration is “often a very expensive process... very few companies are actually rescued with the vast majority subsequently liquidated/dissolved and their assets sold on”.
But as to the practicalities, Freya Summers, a partner in the corporate department of Wright Hassall, says that administration sees an external administrator – usually an insolvency practitioner – appointed to manage a struggling company. She says: “The goal is to either rescue the business, achieve a better outcome for creditors than liquidation, or realise assets for creditors.” Unfortunately, for creditors, she says that administration often means that payments may be delayed, debts may be written down, and their ability to recover funds will depend on the value of the company’s assets and any secured claims.
However, as Taylor comments, “an administrator can only pursue the sale of the firm if it’s not reasonably practicable to keep it as a going concern.”
Control changes
If the business cannot be saved in its current form, admin- istration changes control of the business. As Taylor explains, while directors may stay employed, their powers to operate the company are effectively frozen. The administrator is given wide-ranging powers to carry on the company’s business and realise its assets.
In essence, they must secure control of the company’s assets, prepare proposals for approval of the creditors, and carry out those proposals.
But as Summers notes, it’s important to understand that “if a business cannot be saved, its assets are typically sold off to generate funds for creditors. This may involve selling the entire business as a going concern, selling individual assets, or winding down operations entirely”.
She adds that secured creditors, such as banks, are usually paid first, followed by preferential creditors such as employees, with unsecured creditors often receiving little or nothing.
Buying a business out of administration
Most will be aware of the phrase ‘pre-pack’. This is where a company is put into administration and its business or assets (or both ) are immediately sold by the administrator under an agreement that was negotiated before the administrator was appointed.
As Taylor has witnessed, “often a pre-pack involves the sale of a company’s business on a going concern basis. However, sometimes a pre-pack will just involve the sale of selected assets of the company”.
Summers has seen the same, saying that buying a business out of administration typically involves purchasing selected assets rather than assuming all liabilities: “Buyers can choose to acquire key assets such as stock, intellectual property, customer lists, or premises, while leaving behind liabilities like debts or problematic contracts.” However, she warns that some obligations, such as employee rights under TUPE, may still transfer depending on the structure of the deal.
The key point, and one that leaves some feeling miffed, is that certain liabilities such as a lost litigation case or an uneconomic lease will be left behind by the purchaser.
Avoiding mantraps
A pre-pack has many positives. Taylor identifies them as including: “A quick and relatively smooth transfer of a business to a new owner which can reduce the costs of the administration process – which ultimately results in a better return for creditors, a protective moratorium from creditors, and the opportunity to save more jobs compared to an administration that attempts to continue to trade the business pending a later sale or other type of restructuring.”
But pre-packs have come in for much criticism.
As the Oxford Journal of Legal Studies commented in October 2022, citing the Insolvency Service’s Pre-pack Report 2020, there are “two key concerns at the heart of the pre-pack practice: (i) concerns with trust in, and the transparency of, the pre-pack procedure; and (ii) concerns around the sale of distressed businesses to connected persons”.
In more detail, Taylor addresses the first – a lack of transparency. He says: “Unsecured creditors often do not realise that a pre-pack sale is going to happen and so have no opportunity to protect their interests by considering and voting on the pre-pack proposal. In contrast, secured creditors are usually involved, because they need to consent to the release of their security where secured assets are to be included in the sale.”
But there are other issues such as a lack of accountability as the administrator can sell assets of the company before the proposals have been agreed by creditors and without court sanction.
Also, the value of a business could be destroyed if its financial difficulties are leaked. As a result, an administrator selling the business and/or assets cannot necessarily test the market value of the business by wide advertising for interested buyers. This can play into the hands of a buyer but not the wider market which cannot make a bid.
And then some see pre-packs are similar to the outlawed practice of creating ‘phoenix’ companies. Taylor says: “This practice involves a company being put into liquidation by its management before the same business is transferred to a new ‘phoenix’ company, but without the debts of the former.”
He notes that the practice is discouraged by section 216 of the Insolvency Act 1986, but “that section does not prevent the sale of the business, or regulate the identity of the buyer, instead placing restrictions on re-use of the company name.”
There’s also the writing off of liabilities using a pre-pack which can be seen as a short-term fix if necessary restructuring is not carried out.
Consequently, pre-pack administration (and phoenixism) can hurt the buyers of a company (as opposed to if they had just bought the assets). It can kick the can down the road and may see the firm fail again and may also apply a stigma to the ‘new’ company since others in the sector will know of the links behind the old and new companies.
Protecting the genuine buyer
So, how can a buyer protect itself against purchases it makes in good faith? How do they know what they’re buying and if good title is passed?
In answer, Taylor says that buyers must be careful: “An administrator has broad authority to sell a company’s assets when a company enters administration, acting as the company’s agent with the power to make decisions regarding the management of its affairs, business, and property, which includes disposing of assets as needed to achieve the best outcome for creditors.” He adds a warning: “They will not give warranties and therefore due diligence is key for the purchaser who will not get any better title to the assets that is enjoyed by the selling company in administration.” On top of that a buyer would need to make sure any existing security is released.
And this is the line that Summers takes; she reiterates that “administrators act as officers of the court and are protected from personal liability as long as they act in good faith”. That said, she says that “if they have breached their duties or acted negligently, a legal challenge could be pursued – but this is rare and difficult to prove”.
Dealing with an administrator
But just because an administrator appears to be in an unassailable position doesn’t mean that a creditor, buyer or other third party who has concerns about conduct is impotent.
Seeking redress is far from easy. But if issues arise, Taylor first advises raising the matter with the administrator – “speak directly to the administrator or through a creditors’ committee”. Then, if necessary, he would advise filing a claim for professional negligence: “If the administrator breached their duty of care and caused loss.” He cautions that “this is not an easy action, and a high burden of proof would apply”.
Alternatively, he would recommend applying for a court order: “If the administrator’s conduct was unfair, they failed to perform their duties, or they wrongfully exercised legal authority”. Something else to consider is the filing of a complaint with the administrator’s professional body or form a creditors’ committee to represent the interests of creditors.
And creditors do act. As Printweek reported at the end of January (2025), a new insolvency practitioner had been appointed to oversee the liquidation of Ancient House Press after liquidators chosen by the owners were removed by creditors.
Summary
Buying assets from or the failed firm itself out of administration is a perfectly reasonable course of action. However, buyers need to act with caution, not haste. Not unsurprisingly, good advice is essential.
ISSUES TO CONSIDER
Administrator’s appointment
Buyers should obtain proof that the administrator has been validly appointed and has the power to sell assets.
Know the purchase
It’s important to know what is being sold - business or assets. A buyer needs to determine whether to buy the business and/or assets, or only some of them. An administrator will generally prefer the former apart from cash and book debts.
Buyer beware
Administrators will know little about ‘their’ business and so be unlikely to offer warranties or indemnities. The sale of the business and/or assets will be ‘sold as seen’. This means a buyer needs to satisfy themselves of available information and documentation and physically inspect any assets.
Due diligence
Due diligence must be carried out thoroughly and quickly to understand what is being bought as there is little redress for errors. Legal, financial and commercial due diligence is necessary while stock, property, plant and machinery and similar assets should be inspected. Questions should be asked of anyone connected with the business.
Employees
It’s important to understand which employees transfer with the purchase under TUPE along with any liabilities.
Stock and suppliers
Stock may be subject to retention of title claims so there is a risk that it will need to be returned to the supplier under such a claim. Alternatively, a supplier may sell goods at a favourable price given that it’s already in situ. It also needs to be confirmed that key suppliers will continue their relationships.
Assets
Assets may have a charge secured on them meaning a buyer will need to understand if full title will transfer on purchase. This is especially important if the company was part of a group.
Property
A buyer may not need all of the properties occupied but will want to be able to occupy what it does need. It’s essential to understand if the properties are freehold, leasehold or occupied under licence. If it’s not freehold, lease and licence terms need to be understood and possibly renegotiated; new terms may not be granted.
Customers
It is necessary to identify the customers of the company and establish if the relationship will be maintained; it’s possible the reputation may have been tarnished by the failure. Some contracts permit the breaking of an agreement on insolvency.
Debts
The purchase of book debts is another issue. They may not be collectable in whole or in part or even economic to chase. They may be subject to claims for reduction.
IP rights
Intellectual property may be a central part of the brand identity or the main reason for the purchase. It will need to be assigned. If held under licence it will need to be transferred.
Name
Rules prevent phoenix trading by directors (including shadow directors) of the failed firm from starting a new company with the same (or a similar) name, to exploit the goodwill of the previous company, whilst escaping liability for the debts.
