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Companies in distress often undertake a sale of assets to alleviate cash flow or debt repayment issues when other lines of credit or sources of funds have been exhausted. Such decisions are not taken lightly, especially as the disposal of assets is likely to detrimentally impact the underlying business or forecasts. Ultimately creditors’ demands and survival instincts will result in action being taken. However, it is often too late and to the detriment of the business.
Companies in distress include: those with diminishing cash positions, disproportionate exposure to fluctuating commodity markets, those operating within an oversaturated or competitive market, those that are overleveraged or experiencing soft pressure to repay debt from their financiers and those with an increasing number of unpaid creditors or businesses where there has been a pattern of slippage in terms of trade. The most extreme version of a distressed sale is one of insolvency where the company is no longer under the control of its directors, be it through administration, receivership or liquidation.
There are a number of key areas of concern or focus in such a distressed sale scenario, including:
Ultimately for a purchaser the risk will dictate the price, and it is the seller’s role to ensure the risks are minimised or otherwise dealt with to maximise return. Clearly there are a number of separate concerns that arise in an insolvency sale such as statutory obligations (section 420A), personal liability, adoption of contracts concerns and asset control.
For further information about the considerations of both sellers and purchasers in a distressed scenario please see Distressed Asset Sales.
A recent Federal Court decision serves as a helpful reminder to liquidators about the potential availability of warrants under section 530C of the Corporations Act 2001 (Cth).
In a decision of the Federal Court handed down on 18 October 2019 in Masters v Lombe (Liquidator); In the Matter of Babcock & Brown Limited (In Liquidation)  FCA 1720, Foster J held that...
The status of power of attorney clauses and “step-in rights” provisions under the Personal Property Securities Act 2009 (Cth) (PPSA) remains an issue.