When a limited company enters receivership, also known as administrative receivership, it is usually because it has serious cash flow problems and is insolvent. The same can be said for a company being liquidated. Both processes are for insolvent limited companies and must be handled in accordance with the Insolvency Act 1986.
However, the process and applicable rules for each are very different. It’s not possible to take over a limited company that has entered the liquidation process, but it is possible to take over a limited company in receivership.
The difference between liquidation and receivership
Before we look at the limited company takeover process, let’s clarify the difference between liquidation and receivership.
- Liquidation is a process to realise the company’s assets to pay back creditors prior to the company being closed down.
- Receivership is a process whereby a floating charge holder can seize assets to realise their value as payment, but not for any other creditors.
Liquidating, or closing down, an insolvent limited company can be either voluntary or compulsory. When voluntary, the directors of the company make the decision to close the company due to insolvency. When compulsory, a creditor of the company has petitioned the court to close the company in the hope they get their money back.
Receivership is where a creditor that has a floating charge over a company, such as a bank or other financial lender, appoints a legal receiver to enter the company and ‘receive’ assets to the value of the debt that they can realise, or sell. We should point out that receivership is not the same as administration. This is because with receivership, only a floating charge holder can put the company into receivership.
The receiver is only responsible for realising assets to pay the debt to the floating charge holder, if the company does not uphold their side of the arrangement, and not any other creditors. Like administration, receivership is often considered a form of business rescue and recovery.
Why acquire a company in receivership?
There can be a number of reasons why you would want to take over a company in receivership, including:
- You believe you are able to turn around the insolvent company to make it profitable again. However, you will need to ensure the financial side of the deal is favourable and you have the capital, as well as the resources, to accomplish this.
- It is a competitor company in a mature industry sector and acquiring it provides the opportunity to streamline supply to the market.
- It is a smaller company in the same industry sector that is finding it difficult to penetrate the market and your greater resources will ensure that by working together, there is the potential to secure better contracts.
- The company in receivership has complementary skills and/or technologies that will allow you to expand your current service or product offerings more cost effectively.
- You believe the smaller receivership company presents a scalable business, i.e. its people and/or equipment will help reduce your operational costs.
The Takeover Code
There are four types of takeover bids:
- Hostile; and
Depending on the type of takeover, offers are presented to the board/directors of the company in receivership, which then pass the offer to the company’s shareholders for approval.
Any takeover of a public company is regulated by the City Code on Takeovers and Mergers, which is issued by the Panel of Takeovers and Mergers. The process must be managed in accordance with the City Code’s six general principles and 38 detailed rules.
The most important rules are:
- When 30% or more interests in voting shares are acquired, the purchasing company must make a cash offer to all other shareholders at the highest price paid in the 12 months prior to the offer being announced. If the interest in shares is 10% or less, the offer must include a cash alternative for all other shareholders of that class of the highest price paid in that period.
- If an offeror acquires for cash any interest in shares during the offer period, a cash alternative must be made available at that price, at least.
- If the offeror acquires interest in shares in an offeree company at a price higher than the value of the offer, the offer must be increased accordingly.
- The offeree company must appoint a competent adviser whose advice on the financial terms of the offer must be made known to all shareholders, together with the opinion of the board.
- Favourable deals for selected shareholders are banned.
- All shareholders must be given the same information.
- Those issuing takeover circulars must include statements taking responsibility for the contents.
- Profit forecasts, quantified financial benefit statements and asset valuations must be made to specified standards, and must be reported on by professional advisers.
- Misleading, inaccurate or unsubstantiated statements made in documents or to the media must be publicly corrected immediately.
- Actions during the course of an offer by the offeree company which might frustrate the offer are generally prohibited unless shareholders approve these plans.
- Stringent requirements are laid down for the disclosure of dealings in relevant securities during an offer.
- Employees of both the offeror and the offeree company and the trustees of the offeree company’s pension scheme must be informed about an offer. In addition, the offeree company’s employee representatives and pension scheme trustees have the right to have a separate opinion on the effects of the offer on employment appended to the offeree board’s circular or published on a website.
Acquiring an insolvent limited company can often be a beneficial outcome, not only to the target company, its employees, shareholders and creditors, but also to the purchase company.
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with debt, are considering winding up a solvent company or declaring bankruptcy, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.