Category Archives: Corporate

What warranties and indemnities must I give when selling a business?

Warranties and indemnities play an integral part in the process of selling a business. They provide the buyer with assurances about potential future outlay after the purchase has gone through, and help them deal with the unforeseen business-related issues that could arise.

In the case of a limited company, purchasers take over the existing and contingent liabilities when they buy the business, but some of these liabilities may not be obvious at the time of purchase.

For this reason, the buyer will seek warranties and/or indemnities to protect themselves, whereas, as a seller, you will want to minimise your exposure to the risk of future claims.

What are warranties and indemnities?

A warranty is a written statement provided to the purchaser to back up claims you have made about the business during the sales process. The buyer may not easily be able to verify your claims and statements when they sign the sale agreement, so a warranty provides them with some protection in this respect.

Indemnities, on the other hand, offer security for the buyer from known and specific circumstances that are defined within each indemnity – this makes you liable to cover the buyer’s losses without them having to make a claim against you.

Which warranties and indemnities might you need to provide?

Warranties

Your purchaser will request warranties covering commercial, legal and financial aspects of your business. The list of warranties can be extensive, and may include the following areas:

  • Legal disputes
  • Accounting and other financial information
  • Machinery and equipment
  • Employees and pensions
  • Insolvency
  • Intellectual property rights
  • Property and other assets
  • Contracts
  • Tax issues

When the buyer carries out their due diligence, you provide them with a range of information on which they base their decision to purchase, so they will naturally want a warranty that the information was accurate and up-to-date.

Similarly, if a piece of machinery on which the business relies is not in good condition, your buyer will require a warranty to this effect to prevent them incurring repair costs post-sale.

Indemnities

Your purchaser may require indemnities to cover certain situations, including:

  • Ongoing legal disputes with customers or clients
  • Existing employee disputes/tribunals
  • Litigation regarding a product
  • Tax liabilities

You will want to limit the scope and extent of indemnities where possible, and ensure they relate to specific instances to reduce your potential liability.

Warranties and indemnities are essentially a method of allocating risk in the sale/purchase process. They mitigate the risk for buyers that you have misrepresented your business in some way, but by disclosing information surrounding a warranty you can speed up the sale process whilst also limiting the risk of a future claim.

Jeff Barber is a partner at Selling My Business he specialises in business disposals and acquisitions and has over 30 years of experience.

What is the law regarding company director redundancy?

When determining a company director’s eligibility to claim redundancy, it is important to consider a number of factors based around their general working relationship with the company.

When a limited company is liquidated, the appointed insolvency practitioner will seek to establish whether a director is also an employee of their company, in which case they may be able to claim redundancy and other statutory payments.

So what criteria must be met by a director in this respect?

A written, oral or implied employment contract

If a written contract of employment is in place, the process of establishing a director’s status as an employee may be more straightforward. Lack of a written employment contract does not necessarily mean they cannot claim redundancy, however, as some directors work legitimately as employees under implied or oral contracts.

If a regular salary is received by the director through the PAYE system, and others have made the assumption that they work under a contract of employment, this may be sufficient to persuade the appointed liquidator of the director’s employee status.

The situation can become more complex, however, if the director also holds a controlling interest in the company, but again, this does not completely rule out the possibility of being classed as an employee and therefore eligible for redundancy.

Their role within the company and working hours

Directors need to work for the company in a capacity that is more than advisory, for a minimum of 16 hours per week. Their role should be practical and identifiable in the same way as a member of staff.

Length of time the company has been incorporated

The company must have been incorporated for a minimum of two full consecutive years prior to liquidation, before its directors can become eligible to claim redundancy.

Claims for redundancy pay and other entitlements

Up to £30,000 of redundancy pay is tax-free. Director/employees can also claim other statutory payments including unpaid wages, arrears of holiday pay, pay in lieu of notice, and unpaid pension contributions.

As their business has gone into liquidation, it is likely that the claim will be paid from the National Insurance Fund (NIF) rather than from assets realised by the liquidator. Claims are made via the Redundancy Payments Service (RPS), and generally take up to 12 weeks to be paid.

Eligible directors’ claims will be based on their age, length of service with the company, and final weekly wage, with government caps being placed on several aspects of the calculation, currently:

  • Weekly pay capped at £489
  • Length of service capped at 20 years
  • Maximum statutory redundancy pay capped at £14,670

It is not commonly known that directors are eligible for redundancy under certain conditions, but by claiming this and other statutory payments, it is possible to mitigate the potentially significant financial repercussions of loss of income through business liquidation.

Written by Gary Addison; a director at Redundancy Claim. Gary advises company directors on issues related to director redundancy, employee redundancy and statutory entitlements.

Considering a pre packed sale? Know your legal responsibilities

What is a pre pack?

Before we start, let’s be clear exactly what a pre pack sale is. A pre pack sale is a sale of a business that has entered into Administration, with the sale being effected almost immediately after the Administrators have been appointed – in most cases, this is usually the very same day. The term “pre pack” is used, given that virtually all of the negotiations to buy the business are completed pre the appointment of the Administrators. Once the Administrators are formally appointed, they then have the legal powers to complete the sale.

Sounds all a bit odd? Not really – in most such cases, speed is absolutely vital in ensuring the survivability of the business, especially with one that has significant financial problems. In such circumstances, very few if any prospective Administrators like trading on – the risks are just too great. There are exceptions – BHS, Woolworths etc. – those companies had huge amounts of stock that could easily be sold through their own retail outlets.

The pre pack time lines

Let’s look now at the mechanics and key issues to consider when thinking about a potential pre pack Administration. The time line works something like this:

  • The company directors recognise the company has problems and seeks out the help of a reputable insolvency practitioner. Alternatively, the company’s bankers/lenders decide that the directors need advice and recommend that an Insolvency Practitioner should consult with them.
  • The directors and IP meet so that the IP can get a better understanding of what the company does, what its problems are, and what solutions are available.
  • Assuming that a pre pack sale of the business is the most viable option, and the one that returns the most to creditors, then the planning for this process begins.
  • The IP will organise a valuation of the company’s assets, whilst the directors look to secure the funding to buy the assets back and then to continue trading.
  • Once the valuations and funding are finalised, the IP will arrange for his solicitor to send to the directors’ solicitor, a draft sales agreement – usually referred to as the SPA – sale and purchase agreement.
  • Once the terms are finalised in draft, the IP will then assist the directors in completing the relevant forms to formally appoint the IP as Administrator.
  • As soon as the Administrator is appointed, he will then immediately complete the sale of the business.
  • Depending on the size of company and its complexity, pre packs are usually completed within two to three weeks of the IP first being consulted.

The legal considerations

The main legal requirement of any pre-packaged sale, is that it must be the deal that returns the most back to creditors. However, there are some transactions where that simply will not be possible, given that after paying secured creditors and the costs of the Administrator, there will be no surplus funds available.

When the Enterprise Act came into force , it abolished the right of HM Revenue & Customs to be preferential creditors. To partially compensate for this and also, to try and return some funds to unsecured creditors, the provision dealing with the “prescribed part” became law. Basically in all Administrations, the Administrator has to put to one side a proportion of the sales proceeds in order that a dividend can be paid to the unsecured creditors. This is worked out by reference to the “net property”. The net property is the amount realised for none charged assets, after the costs associated with the realisation have been deducted. The Administrator must then take 50% of the first £10,000 of net property and 20% of the balance up to a maximum of £600,000, and use this to pay a dividend to unsecured creditors. Let’s say that the Administrator has realised £100,000 for stock, and other assets that are not charged. His costs amount to £20,000, so the net property is therefore £80,000. The prescribed part is therefore £19,000, being 50% of the first £10,000 (£5,000) and 20% of the next £70,000 (£14,000).

Another key consideration are the SIPs that any IP must work with – Statement of Insolvency Practice. These are effectively best practice guidelines that all IPs must follow. The two key SIPs that affect pre pack Administrations are SIP 16 and SIP3. SIP 16 deals with all of the relevant issues affecting how an Administrator goes about effecting a pre pack sale. SIP 16 covers the following key points:

  • The IP must be clear as to his role in giving advice to the company pre appointment and his role post appointment in acting as Administrator.
  • The IP must inform the directors of the existence of the pre pack pool and recommend that the directors submit their proposal for pre pack sale to the pre pack pool. The directors are under no legal obligation to submit their plans to the pre pack pool, although doing so does help with the issue of transparency.
  • Independent professional valuations of the company’s assets should be organised by the IP.
  • The IP/Administrator must demonstrate that he has marketed the business to the widest possible audience – the guidelines on this are fairly strict and are given in an appendix attached to SIP 16.
  • The Administrator must within 7 days of the transaction completing, issue a comprehensive report to all creditors explaining why the pre-packaged sale was in the best interest of creditors.

SIP 13 deals with transactions with connected parties – as most pre packs are with existing directors, then this SIP will usually also apply. This SIP is not as detailed as SIP 16 and the key issue is that the Administrator must demonstrate that, by completing a sale of the business back to the directors, that he has acted in the best interests of the creditors.

General considerations

Most of the onus for ensuring that a pre-packaged sale complies with statute and the relevant SIPs, falls mainly on the IP/Administrator. That said, you do need comfort that the IP/Administrator has complied with all relevant statutes/SIPs etc. to ensure that there’s no comeback later on. The best way to ensure that you are protected is to engage a suitably qualified lawyer to act on your behalf – ideally, one that has some insolvency knowledge.

For most directors looking to complete a pre-packaged sale, the most important issue is finance – how to fund the actual acquisition of the business and then how to fund trading in the new business until cash flow kicks in. These issues are best addressed with your own accountants. It is an issue though, that you must have resolved before contemplating a pre-packaged sale/purchase – very few Administrators give credit!

Richard Saville is a Licensed Insolvency Practitioner with Corporate Financial Solutions. He has over 40 years of experience helping companies large and small who may be experiencing financial problems. Richard takes pride helping to save struggling businesses and return them to profitability. He has an extremely broad knowledge across most industries having effectively dealt with pretty much every type of business around!