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Rescue of insolvent retail business in the new environment: Commercial contracts on Insolvency

While, in general, a buyer of a business and assets from an administrator will not take over any liabilities of the seller, there are exceptions. One exception relates to employees (on which see the separate article in this series on the impact of TUPE), but there will also be certain commercial contracts of the business to consider, especially those which are integral to “business as usual” activities.

Insolvency asset purchase agreements (APAs) will typically include an obligation on the buyer to take over and perform ongoing contracts with suppliers and customers. Careful thought will be required as to whether this is commercially sensible in view of the future activities of the acquired business.

Under the Corporate and Insolvency Act in June 2020, UK suppliers of goods and services are now prevented from terminating or otherwise amending agreements with companies undergoing any insolvency procedure (other than in very limited cases). These changes were designed to ensure key suppliers vital for a business to achieve continued trading/business rescue remain in place as long as possible, particularly in the current economic climate. They are undoubtedly beneficial to potential investors in distressed companies: previously suppliers to those businesses were liable to hold distressed companies to ransom on the premise that they needed better terms or would terminate the arrangement in reliance on any insolvency clause(s).

Against this background, any purchaser should consider the following commercial contract based questions:

  • Are the key contracts needed to operate the business assignable to a new owner? Ultimately, this will depend on what the relevant contract says (or doesn’t say) about assignment. This is particularly important for businesses which rely on IP obtained via commercial agreements - licenses for trade-marks and software, franchise agreements, agency, distribution agreements etc. Depending on the position, it may be necessary to get assurances from the relevant counterparties that they are willing to consent to assignment.
  • Has the insolvent business previously been complying with its core contractual obligations? If a breach which would have entitled the supplier to terminate prior to the customer's insolvency recurs after the insolvency process begins, it would be regarded as a fresh breach and the supplier could (depending on the terms of the contract) terminate on that basis.
  • What is the financial predicament of key suppliers and are the businesses’ contractors reliant on sub-contractors to be able to perform? If so, diligence those relationships and what could happen if the suppliers fail to perform/those sub-contractors are not paid – if necessary seek rights to “step-in” and pay sub-contractors directly.
  • Any Retention of Title (ROT) issues? Even if the buyer is not taking over ongoing contracts, the impact of ROT in supply contracts to the seller will need further consideration. Typically, APAs will require the buyer to indemnify the administrator against liability under ROT and give no price reduction if the goods need to be returned to the supplier.
  • Does the business hold any equipment on lease/similar arrangements? Such agreements provide for legal ownership to be retained by the financing party and so require new agreements to be reached with them by any new owner.

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