We were recently instructed to advise a business in financial difficulty. It was clearly insolvent and under pressure from creditors, however, there appeared to be value in the core business, built up over 50 years of trading.

The incumbent management had belief in the business as well as years of investment of time and money and expressed an immediate interest in acquiring it. Given the nature of the business and working capital requirements, we advised that a marketing exercise be undertaken, with the health warning to management that we were likely to receive some real interest in it. We marketed the business and, unsurprisingly, received good initial interest. However, whilst the business itself was good, the inherent liability attached to a very loyal workforce meant that the TUPE obligations caused most to fall away. However, one party stuck it out and we awaited an offer.

When it eventually came through we were initially a bit confused as the offer was for the Company’s shares - the buyer would take the Company on with its inherent (and pressing) liabilities and release the directors / shareholders from office, even relieving them of their personal guarantee obligations. All they had to do was shut the door behind them and walk away. As proposed Administrators, we had no locus to deal with a share sale, but we did let the shareholders know about the offer so that they could consider it. The shareholders included the incumbent management team that were interested in acquiring the business, who between them had 76% of the share capital and could therefore block or agree the proposal.

This immediately gave them a three way headache… did they look at this approach from the perspective of a shareholder, with a cash offer to acquire their (otherwise worthless) shares, as a “competitor” in the bid to acquire the business, or with their director’s “hat” on?

Whilst the commercial angles appear to complicate that question, the answer was actually fairly straightforward as far as legislation and Statement of Insolvency Practice No13 (“SIP13”) is concerned. Notwithstanding that the management team wanted to buy the business there was an obvious “get out” by having someone take on their PGs and pay them for their shares.  However, the offer gave them no comfort as to what might happen to the Company or its creditors post acquisition - it was estimated that the working capital requirement would be in the region of £250k+ just to keep the Company alive, let alone any capital expenditure or even returning it to full solvency - the offeror made no representations about what he would pump in to the Company or how he would deal with the obligations to creditors etc. The proposed sale of business in administration at least had a measurable outcome, against which other options and outcomes could be compared - the share sale contained complete unknowns as far as the buyer’s intention were concerned with the Company generally, but specifically (and importantly) to its creditors.

When a company hits the buffers, a director’s thoughts and fiduciary duties shift, from their usual duty of acting in the best interests of the  and enhancing shareholder value (section 172-174 Companies Act 2006) to being specifically focussed on the interests of creditors. SIP13 is clear in this and sets out a director’s obligations in these circumstances, especially where there is an intent for the director(s) to acquire the business from an office holder.

And it was this that enabled the management team to crystallise their thoughts and treat their financial interests as shareholders, guarantors and potential purchasers as secondary to their fiduciary duties as directors.

So, with their minds focussed, the directors sought to bottom out the interest by ascertaining what the buyer’s intentions were as far as the creditors were concerned. They reasoned that if the buyer produced a financially backed undertaking to inject a level of funds that would outturn a better outcome for creditors, they recognised their duties meant that they would be duty bound to consider it.

The bidder’s response was not what any of us expected… his intention was to acquire the shares and immediately place the company into administration, with a back to back sale to a Newco which he controlled, we assume utilising the services of an alternative insolvency practitioner.

The case highlights the potentially conflicting dynamics directors face in what is already a stressful scenario and the importance of being able to prioritise their fiduciary duties and put any other interests they have to one side. The outcome in this case could have been very different for creditors and the directors had their minds not been so focussed and had they not taken independent advice. 

Danny Allen

Senior Manager

 

All contents Copyright © PCR (London) LLP unless otherwise noted. None of the elements on this website may be reused without permission.