Deal(s) with the trustee
A trustee’s task
After a company is declared bankrupt a trustee will be appointed.
One of the main tasks of the trustee is to liquidate as much of the company’s assets as possible in order to pay as many creditors as possible with the proceeds. The trustee therefore has an interest in reaching a deal with a buyer at the earliest opportunity.
The trustee usually begins this process by sending out a notice to potential buyers informing them of the bankruptcy and by announcing that (part of) the company is for sale.
The owner of the bankrupt company may make an offer himself, but competitors and other external parties may also declare an interest in acquiring the assets at a favorable price in order to increase their market share.
In this article, we elaborate on a few important points which you, as a potential buyer, should take into consideration when making an offer to acquire (part of) a bankrupt company.
The bidding process
If you are a potential buyer, interested in acquiring assets from a bankrupt company, it is crucial to be assisted by a legal specialist, such as a lawyer with the trustee, to avoid legal steps with detrimental effects.
The bidding process starts by declaring your interest in a relaunch and indicate to the trustee that you would like to receive further information.
Ideally, at that point in time, the trustee should be able to produce a valuation report and/or a report of the company and its assets so it is clear which assets are up for sale. This allows you to assess the scope of your interest in the company and/or its assets.
The trustee will also inform you of the particulars of the bidding process. Usually a deadline is offered on fairly short notice as to when and how all bids must be in. Often a trustee will also indicate that the bid has to be finalised in the first instance and that no further bids are allowed. Please note, that in practice, the trustee might end up deviating from that principle, but this cannot always be predicted.
You have to be aware that, in accepting a bid, the trustee is bound by approval of the bankruptcy judge. Thus, a deal can only proceed if the bankruptcy judge agrees with the bid. Unfortunately the bids are presented to the judge by the trustee, so the potential buyer is depending on the tone and presentation of the trustee.
In the offer letter, an amount can be bid per asset-component such as stock, inventory, goodwill, intellectual property, personnel, and debtors. Alternatively, a total amount can be offered for all the asset-components, which the trustee will then be allowed to divide by component.
Some trustees will allow ‘cherry-picking’ but usually they will prefer an offer for all available assets in order to be able to sell the company as a whole. After all, this saves them time and effort by not having to sell separate parts publicly at the expense of the estate. We therefore recommend potential buyers to make a complete bid. As such you are one step ahead of other interested parties who are not prepared to do so.
When negotiating, goodwill (which tends to include customer files and intellectual property) is likely to be an essential issue for both parties. This is because the trustee will not be able to sell this publicly through an auction office if a restart cannot be achieved.
The trustee also knows that competing buyers usually have a particular interest in goodwill. Take this into account when making an offer. Explain why you think that amount X is a suitable price, since goodwill remains an abstract concept and therefore often difficult to valuate by both parties.
Agree on the rights of third parties
Each market and type of business obviously involves different considerations. For example, in an industry such as Retail, it is very beneficial to have inventory available at a lower price than the purchase value. However complications may arise in this very area due to the existence of “third party rights.”
Suppliers are often protected by retention of title, right of claim and perhaps even by “lease”, which prevents the trustee from transferring ownership. As the bidding process usually starts shortly after a bankruptcy is declared, chances are that the trustee does not yet have a complete picture of the existing third party rights. We therefore strongly advise you to assess this – if possible – yourself before bidding or at least to ask the trustee about the existense of third party rights.
Please note that the existence of third-party rights doesn’t always have to be detrimental. Suppliers are usually not eager to have items that have been delivered returned to them. Rather, they have an interest in selling the items. As a potential buyer, you might therefore have more leverage when negotiating the purchase price with these suppliers.
If it is not sufficiently clear what third party rights are involved, you can take this into account when bidding. For example, you can state as a condition that you will only bid amount X if third parties cannot lay claim to more than, say, 20% of the stock, or that the purchase price will be reduced if more than 20% of the third parties demand the return of their items within a certain period of time. This is all negotiable.
Don’t forget the (ongoing) agreements
The trustee of a bankrupt company will move quickly to terminate non-essential contracts in order to save costs. Suppliers themselves may also have already terminated/dissolved a contract even without the knowledge of the trustee.
During the bidding process it is important to gain insight into existing contracts in order to assess which contracts need to be continued and at what costs. The trustee may ask for a compensation for his cooperation/agreement with the transfer of the contract. However, but you do not want a contract party such as a webhosting company or administration package supplier to make its cooperation conditional on a new buyer clearing any payment arrears. Therefore, ask for a current overview of existing contracts to allow you to consider the continuation of certain services.
If you have any questions about this article, please feel free to contact us.
 Please note that it is debatable whether a customer base can be sold/pledged.