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Acquisition of Companies in Bankruptcy Procedding

Index

I. Bankruptcy proceedings: an approach to the procedure.

II. Concept os production unit (PU).III. Bankruptcy agreement:sale of PUs.IV. Bankruptcy liquidation: sale of Pus.V. Case studies.

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Bankruptcy proceedings:an approach to the procedure

1. Insolvency. Stay/Dismissal of proceedings. Application.

2. Judicial proceedins.3. Mercantile courts. Bankruptcy administrators (BAs)4. Common phase. Report. Assets. Liabilities.5. Agreement phase.6. Liquidation phase.7. Rating.8. Reintegration.

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Guiding principles

Principle of par condicio creditorum.Principle of universality.Principle of protecting all assets.Principle of restricting privileges.Principle of continuity of company (art. 44 LC).

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X-ray of a company in bankruptcy

Series of tensions. Refusal os suppliers to serve. Cuts in supplies. Calls of wildcat strikes. Dissatisfied customers for breaches. Disapproving or fleeing partners. Talent drain. Zero business training of BA. Collapsed courts.

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X-ray of a company in bankruptcy (II)

Bureaucratic procedure. Guiding principles and rules created during a

boom period. Spring bankruptcy. Debtor’s fear os a guilty rating. Guarantees. PU buyer’s fear of being “contaminated” by

liability.

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X-ray of a company in bankruptcy (III)

Demanding bankruptcy administration. Banks demanding guarantors. Press harassment with damaging news. Disoriented business person.

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Production unit: indeterminate legal concept defining an independent economic entity capable of undertaking a business or professional activity by its own means.

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Series of human, intangible and material resources forming a business capable of functioning independently and of being transmitted.

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Features:

Only includes assets (without prejudice to the transfer of undertaking for labour purposes).Its value as a whole is greater to that of its individual form.There is a strong interest in maintaining it.The differential factor is that the market perceives continuity in the business withou any change other than that of its owner.

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What is not production unit?:

Exclusively all machinery without the workers.Trademark.Portfolio of contracts.Portfolio of customers.Hiring of a group of workers.

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THE AGREEMENT

Advantages:

Better press.Non-problematic preservation of licenses, administrative classifications, against insurance companies or banks, ISO, AENOR, etc.Payment to creditors.

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Disadvantages:

Subsitence of bankruptcy liabilities against assets.Risk of contingent liabilities (AEAT).Consensus of all partners, majority of creditors and BA.Long implementation periods.Bureaucratic process.Price for partners (pax out)Bankruptcy agony…

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PU PURCHASE: Guiding principles of liquidation

Transparency (151 LC). Flexibility (15 veces en la EM). Preserving the unit (148 y 149). Worker’s meeting (148.3). Combination of maximum price with continuity of

company (149.1)

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WTSO IURISTAXWeaknesses

Social conflict?Deterioration of image

for customers?Loss of approvals,

certifications, classifications, activity

licenses?Termination of

contracts?Talent drain?Pressure from competition?

Costs of resortoring confidence?

Adaptation to turnaround?

Threats

Challenges to plan?Judicial bureaucracy? Unnecesssary delay.

Corruption.

StrenghtsValue of intangibles?

Collaboration of management team?Deferred payment.

Implicit prices (completion of works,

environmental problems, etc…)

Treatment of mortgaged property.ResilenceFlexibility

Opportunities

Existence of other bidders?

Are we the last chance?Professionalism of

advisory team?Buyer solvency?

Support of feasibility plan?

Return on investment?

Information •Due diligence. Maximum information. WTSO [BS]•Sales procedure. •Existence of competitors.

Offer•Binding. Speed up deadlines.•Maximum discretion (or not).•Compliance with formalities.

Sale•Strenght of resolutions. •Documentation / title.•Registration of fixed assets.

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Buyer’s demands

• Transparency.• Maximum information.• Brief deadlines.• Generic offer, with inclusions and without perjudice. • Coverage of labour liabilities.• Price to earnings.

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PU disposal systems in LC

a) Under Article 43LC.

43.2. Until court approval of the agreement or commencement of liquidation, the property and rights comprising the assets cannot be disposed of or encumbered without judicial authorisation.

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43.3. Exceptions to that stated in the above paragraph:

• 1. Disposal actions that the bankruptcy administration considers essential to ensure the viability of the company or the liquidity needs required for the continuity of the bankruptcy.

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• 2. Disposal actions of property that is not required for the continuity of the activity when offers are submitted substancially matching the value given to said property in the inventory. The match is considered substantial if in the case of real estate the difference is less than 10% and in the case movable property some 20% and there is no higher offer.

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• 3. Disposal actions inherent in the continuation of the debtor’s professional or business activity under the terms established in the following article.

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b) The part of Bankruptcy Liquidation.

Preparation of Liquidation Plan.Delivery to parties for their comments.Plan approval.Possible appeal (firmly within 20 days).

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Elements of offer

1.- Scope:

Generic definition by inclusions: production unit in general.

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Specific definition by inclusions (subjetct to final payment clause):Scope of offer: All assets, that is, the production unit, including trademarks, logos, licenses, corporate image, software, website, projects, plans, designs, patents, catalogues, samples, utility models, goodwill, trade faie rights, contracts in force, list of customers and theis circumstances, machinery, fixed assets, rights on leased assets, computers, stocks and raw materials and all property and rights comprising production unit.

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Definition by excluions:

Liquid assets.Customers account.Division of …

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2.- Price

Explicit:• Specific economic amount.• Possible fixed price according to variables of

business destination.• Possible deferred payment.

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Implicit:

Termintation of ongoing contracts to avois charges for delays in completion of work, abandonment, defective performance, etc. (define cutoff date)

Cleaning of toxic, unhealthy or dangerous waste.

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Tracking management of recoveries from customer portfolio.

Coverage of guarantees up to a certain amount.Subrogation of employment contracts so that

proceedings will save payment of indemnities in favour of all or part os the workforce.

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3.- Conditions

• The bidder shall in no way be subrogated to any obligations with the Spanish Tax Office, Spanichs General Social Security Treaury (TGSS), Spanish Wage Guarantee Fund or labour debts of the bankruptcy company. Consequently, there is no transfer of business against such organisations or others of a public nature and people, and this must be stated in the Adjudication Ruling, which is understood as tacitly recognised otherwise.

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• Assets and rights shall be delivered free of liens and encumbrances.

• The offer shall be expressly ratified, approved or authorised by the court hearing the company’s bankruptcy proceedings, without whose authorisation it shall not be valid.

• The validity of the offer is until the day … at which moment the bidder shall be released from any obligation in this regard (short deadlines are advisable to move the proceedings forward).

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• The budder may subrogate the leases, indluiding the contracts for leased assets, leasing or renting, that the insolvent / bankruptcy company has signed, without entitlement to compensation of any kind for the latter.

• The bidder shall be subrogated in the service contracts and execution of works that the insolvent company has signed with third parties, deducting in his favour the economic performance of the work executed after the cutoff date that is established to enforce the subrogation.

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• This present offer is binding in its condition.• The offer must be understood as a whole, without its

clauses or conditions being accepted individually. Otherwise it shall be deemed as not established.

• The bidder reserves the right to assign the rights pertaining to the adjudication or sale to a third company with which it forms a group or is linked, which must mean that the social administration of the insolvent company has an interest in the outcome and success of the operation.

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Treatment of employment claim JM of Tarragona Ruling on 30 April 2013However, Article 149.2LC allows that the judge in the adjudication ruling may agree that the purchaser is not to be subrogated that portion of wages or compensation pending payment prior to the disposal that is assumed by the Wage Guarantee Fund (FOGASA) in accordance with Article 33ET. In other words, the amount of wages and compensation in accordance with Article 33ET was paid by FOGASA as a result of the bankruptcy of the business owner employer, and would have the right of subrogation to turn directly to the insolvent debtor, and it shall not be reclaimable from the purchaser of the business or production unit if released from this obligation by the judge of the bankruptcy proceedings

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Mortgage issue

The sale of the production unit may naturally include assets subject to singularly preferential credits; for example, a property encumbered with a mortgage or financially leased assets, which cannot prevent the sale of the whole, but adds the difficulty of allocating a share of the price obtained by the sale to the payment of this credit. For example, if an operational production unit is sold that includes a warehouse encumbered with a mortgage and machinery for a single price, the part of the price that has to be allocated to the payment of the mortgage has to be defined.

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TGSS issueIURISTAX

Many courts and tribunals have also ruled on this matter in favour of the TGSS, including, among others, the following: Judgement of the Administrative Litigation Chamber of the High Court of Cantabria on 1 April 2011, Ruling of the Provincial Court of Álava on 24 March 2011, Ruling of the Provincial Court of Badajoz on 20 September 2012, Ruling of the Provincial Court of Badajoz on 27 October 2011.

In addition to the following: Ruling of Mercantile Court Nº. 1 of San Sebastián on 18 November 2010, Ruling of Mercantile Court Nº 1 of Cádiz on 31 July 2012, Ruling of Lower Court Nº 10 of Santander on 14 October 2008, Ruling of Lower Court Nº 3 of Huesca on 16 July 2009, etc.

IURISTAXMoreover, the reasoning of the Judgment of Administrative Litigation Court Nº 3 of Jaén on 30 March 2012 states that the judge of the bankruptcy proceedings cannot intervene in defining the other consequences of the disposal not contained under Article 149. Thus, as already mentioned, if a transfer of business exists, the mercantile judge may exempt the successor acquirer of the payment of wages that were paid by FOGASA, but not of the commitments already made to the TGSS. Therefore, it is considered that the power of deriving administrative responsibility for the transfer of business in administrative proceedings corresponds to the TGSS, subject to the administrative litigation courts, which have to rule on the appeal against which it is aimed.

Other aspects to consider Control of social media Need for circulating capital (Modiss) Demand confidentiality letters. Do not facilitate customer

relationships Demand transparency and publicity. Necessary

promptness of proceedings because of loss of value Ongoing communication with stakeholders Obligatory company information Advisable collaboration of management staff Possible demand of deposits

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AGREEMENTBetter pressSubsistence of bankruptcy liabilities against assetsRisk of contingent liabilitiesConsensus of all partners, majority of creditors and BALong implementation periods(4 months)Bureauvratic processPrice for partners and bankruptcyBankruptcy agonyPreservation of approvals, licenses, administrative classifications, ISO, AENOR…

LIQUIDATIONWorst pressFull cleanout of liabilities

No contingent liabilities

Consensus of BA and approval by courts

Short implementation time(1 month)

Agile process

Bankruptcy price (creditors)

New blood