How to buy back a business from a bankruptcy estate?

The recent trend with an increasing number of bankruptcy filings continues. The number of bankruptcy filings increased from 823 in Q3 2022 to 938 in Q3 2023. This represents an increase of approximately 14%.    

There may be various reasons why a company goes bankrupt, but we often see that the bankruptcy is due to high debt in combination with temporary liquidity problems. In such situations, it may be possible to continue operations if a buyer acquires the company's assets from the bankruptcy estate, while leaving the debt in the bankruptcy estate. Purchases from the bankruptcy estate can often be made at a significant discount, i.e. at a so-called "slaughter price".  

SALES PROCESS ‍

The company's board of directors is required to file a petition for bankruptcy with the district court if the company is insolvent. If the district court determines that the company is insolvent, the district court opens for bankruptcy proceedings and appoints a lawyer as administrator. The administrator is, among other things, mandated to sell all assets in the estate and distribute the proceeds to the creditors.

Normally, it takes no more than a couple of days from the time the district court receives a petition for bankruptcy until the court has made its decision to open bankruptcy proceedings and appointed an administrator. From this point in time, the company loses control over all of its assets as the assets are seized by the estate. Immediately after the opening of bankruptcy, former owners, management, employees or third parties can contact the administrator with a request to negotiate for the acquisition of all or parts of the business.    

The administrator will initially sell the assets to the highest bidder, but often many of the assets will have little or no value to anyone other than the former operators/owners. A repurchase of assets from the estate therefore represents an opportunity to "reset" the business by the buyer only taking over assets and not debts or liabilities.  

AGREEMENT TO PURCHASE A BUSINESS FROM A BANKRUPTCY ESTATE

An agreement on the purchase of a business from the bankruptcy estate will normally list all the assets to be assigned from the bankruptcy estate to the buyer. The list will typically include assets such as accounts receivable, IP, inventory, operating equipment, etc.

Employees. The effect of bankruptcy is that all employees are dismissed. However, a purchase of the business from the bankruptcy estate will often entail that the buyer enters into new employment contracts with a large number of employees, thereby securing jobs. A good reason to include employees is of course to ensure continuity of operations, but the estate can also make this a requirement in the asset purchase agreement as this saves the estate (and thereby the creditors) from potentially large priority claims from employees who have lost their jobs. In the process of planning for future operations, the relationship with employees must therefore be addressed, including who should be offered employment.        

Contracts (and especially leases). The buyer of the business does not take over the contracts held by the estate, nor can the estate require contractual counterparties to enter into contracts with the buyer. This means that the buyer must either take the risk that any important customers and suppliers will enter into new agreements with the buyer, or the buyer must negotiate with important customers and suppliers at the same time as the buyer negotiates with the estate. An important exception to this principle is leases, where the estate can actually demand that the agreement with the landlord is taken over by the buyer.  

Secured creditors. Banks and other debt providers will normally have a lien on the company's assets as security for their debt financings. Typically, this may be a pledge of real estate, inventory, operating equipment and/or other more liquid assets such as accounts receivable. 

In parallel with the negotiations with the bankruptcy estate, it often makes sense to negotiate with the secured creditors. One solution we see from time to time is that the buyer of the business also assumes some or all of debt owed to the secured creditors as consideration for taking ownership to secured assets. This will in turn reduce the need for working capital because the purchase price will partially be financed by the secured creditors. The negotiations with the secured creditors are therefore often vital to secure the best overall deal to purchase the business.

Preparations. Prior to, and in connection with, the completion of the acquisition of a business from a bankruptcy estate, there are a number of practical matters that must be handled. Typical examples are the establishment of a new limited liability company (purchase of a shelf company), opening a bank account, registrations of various kinds (VAT register, etc.) and handling the contract portfolio to transfer contracts to the new limited liability company. For negotiations with any secured creditors (often a bank), it may be helpful to engage financial advisors with specialist expertise in negotiating with financial institutions.

If you have any questions about buying a business from a bankruptcy estate, please contact us:    

Ketil Enerstad Sauarlia (Partner) / Ketil@agpadvokater.no / +47 417 62 807

Peter Tranvåg Skutvik (Partner) / Peter@agpadvokater.no / +47 918 72 258  

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AGP is a law firm specializing in transactions, capital markets and corporate. Advising on the acquisition of businesses from bankruptcy estates is one of our core competencies.

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