What’s IDV and why should you care?

• 18 August 2025
• News

Capital Gains Tax: Time to act before autumn?

• 12 August 2025
• News

The National Institute for Economic and Social Research (Niesr) forecast last week that Rachel Reeves faces a £51 billion black hole in the UK’s public finances. The forecast said that she will have to raise taxes in the 2025 Autumn Budget if she is to meet her spending pledges and stick to her fiscal rules. Although the Niesr report is gloomier than some other forecasts,  many recent reports have warned that the government’s situation means that it will have to raise taxes.

One consequence of this is that if you are thinking about selling the shares in your personal company, you should consider accelerating the sale in case rates of capital gains tax increase when the Autumn Statement is announced. The date for this has not yet been made known but normally this event occurs in late October/early November each year.

In the 2024 Autumn Statement, Rachel Reeves increased the main rate of capital gains tax from 20% to 24% and made changes to increase the rate of tax where Business Asset Disposal Relef (BADR) applies from 10% to 14% (increasing to 18% from 6 April 2026). Importantly, the new rates applied immediately from the date of the Autumn Statement, with anti-forestalling arrangements potentially applying unless contracts for sale had already become unconditional and completed.

At this stage it is, of course, not possible to know whether rates of capital gains tax will increase again in the Autumn Statement or whether Rachel Reeves will leave this tax alone and increase other taxes instead or freeze income tax thresholds for a longer period.

However, If you own shares in your personal company and would like to discuss your position further, please contact Heather Corben or Elizabeth Small.

Lifecycle of a business – Understanding warranties and indemnities

• 6 August 2025
• News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve considered the main aspects of the lifecycle of a business from the beginning and you now want to sell…

Understanding warranties and indemnities

When buying or selling a company, warranties and indemnities are essential to manage risk. They help mitigate against the let the buyer beware principle (caveat emptor) and enable the buyer to find out more about the company it’s acquiring.

But what’s the difference between a warranty and an indemnity and how do they work?

What’s a warranty?

A warranty is a contractual statement of fact usually made by the seller(s) to the buyer regarding the condition of the target company or business, for example, the seller(s) might warrant that the target company isn’t involved in any litigation as at the date of the purchase agreement. If a warranty turns out to be untrue, the buyer can bring a breach of contract claim against the seller(s). If the claim is successful, the seller(s) will have to pay damages to the buyer. The amount of damages awarded will typically be the difference between the value of the shares had the warranty been true and their actual value (subject to rules on mitigation and remoteness).

The scope of the warranties will depend on several factors, including the bargaining position of the parties, the terms of the deal, and the nature of the business. Common areas for warranties to cover include ownership (of the shares), legal compliance, accounts, litigation, employment, and intellectual property.

What’s an indemnity?

An indemnity is a promise (usually given by the seller(s)) to reimburse the buyer for a specific loss, often on a pound-for-pound basis. So, taking our litigation example again, if a third party has brought a litigation claim against the target company which the target company is likely to lose, the buyer might insist that an indemnity in respect of that specific litigation claim be included in the purchase agreement. The seller(s) will then have to reimburse the buyer for any loss suffered by the target company in relation to the claim once the sale of the target company has completed. 

Who gives warranties and indemnities?

Warranties and indemnities are usually given by the seller(s). In group structures, the parent company may also provide the warranties and indemnities (or a guarantee to stand behind the warranties and indemnities that are given).

Exceptions where the seller(s) may be unwilling to give warranties and indemnities include:

• passive shareholders who have nothing to do with the business and have a small shareholding (e.g. family members who have been given shares but have no day-to-day running of the company)
• private equity firms (it’s common practice on an exit for private equity firms not to give any warranties)
• employee shareholders (i.e. non-managers) who have limited knowledge of the business.

Why include warranties and indemnities?

Warranties

Warranties are crucial to a buyer because there are no statutory or common law protections regarding the nature or extent of the assets or liabilities being acquired; the principle of caveat emptor (let the buyer beware) applies. Having the seller(s) give promises about the target company and its business gives comfort to the buyer as to what exactly it’s buying.

In addition, where a warranty would be untrue, the seller(s) can disclose against that warranty. So, in our litigation warranty example above, if the target company is actually involved in litigation, the warranty will be included in the purchase agreement, but the seller(s) will disclose the details of any litigation in which the target company is involved to the buyer. This enables the buyer to find out information about the target company and business which may be additional to anything discovered during the due diligence exercise. From the seller(s) point of view, it means that the buyer will be unable to bring a successful claim for breach of the warranty, as it had knowledge of the true state of affairs. Any matters to be disclosed are usually included in a separate document, the disclosure letter.

Indemnities

Indemnities protect the buyer financially in the event that specific losses or losses which are of particular concern to the buyer arise post-sale. (Other options may also be available to the buyer if it becomes aware of any specific issues before completion of the sale, for example, it may try to negotiate a lower purchase price, change the transaction to an asset deal or even walk away.)

How can a seller protect itself against a warranty or indemnity claim?

To manage the liability risk of the seller(s) when giving warranties, the parties will usually include caps on liability in the purchase agreement (e.g. they might agree that the seller(s) will only be liable up to a maximum amount equal to the purchase price). Minimum thresholds may also be included (e.g. a claim can’t be brought by the buyer unless it has a value of more than £x) to prevent the buyer bringing “nuisance” claims. Other seller protections may also be included but these are outside the scope of this article. Whether the caps and thresholds will apply to indemnities will be a matter for negotiation between the parties.

Where there is more than one seller, they will need to decide how any liability will be shared between them.

Insurance can also be taken out to cover off warranty and indemnity risks. This is outside the scope of this article but if you would like to discuss further, please get in touch with your usual Forsters’ contact or a member of the Forsters’ Corporate team.

Conclusion

In summary, warranties and indemnities are fundamental mechanisms for allocating risk in corporate transactions.

While warranties encourage transparency and enable the buyer to sue the seller(s) for breach of contract if they turn out to be untrue, indemnities offer targeted financial protection for known risks.

The strategic use of both tools (alongside robust disclosure processes and carefully negotiated contractual limitations) enables parties to strike a fair balance between protection and commercial pragmatism. For sellers, thoughtful drafting and liability management are key to limiting exposure, while buyers must ensure that the warranties are wide enough to be of actual use and that the contractual framework provides sufficient remedies for potential losses.

Disclaimer

This note reflects the law as at 6 August 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Lifecycle of a business – Pricing the deal

• 17 July 2025
• News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve considered the main aspects of the lifecycle of a business from the beginning and you now want to sell….

Pricing the deal

The price is the fundamental term of any M&A transaction. A seller will be keen on price certainty, whereas a buyer will often want to know they’re getting value for money. In addition, how the price is structured may depend on how aligned the parties are on the headline value and whether the buyer is keen to retain, for example, owner managers in the longer term.

This article focuses on price and value certainty by considering the key features of completion accounts and locked box pricing mechanisms. Deferred payment structures and earn-outs (often used to allow for any valuation gap to be bridged based on future performance or to otherwise incentivise retention of key individuals during a post-closing integration period) are outside the scope of this article.

Completion accounts

In a completion accounts deal, the sale agreement will typically provide for an initial purchase price payment to be made on closing (based on estimated numbers), with a post-closing adjustment made in accordance with an agreed ‘equity bridge’, that is, the adjustments to the enterprise value / headline price to be made to reach the ‘equity value’, being the value available to the target group’s shareholders. 

The equity bridge will often be a cash free debt free adjustment, with a working capital adjustment, or a net assets adjustment (the latter commonly seen, for example, in corporate real estate transactions).

Looking at a cash/debt/working capital adjustment, this would customarily look like:

There may be other fixed transaction specific adjustments too.

With this structure, the economic risk passes to the buyer on closing, and there is less price certainty for a seller due to the post-closing adjustment, particularly on a conditional deal. This aspect of completion accounts is unappealing for sellers, particularly those with stakeholders such as private equity investors.

The parties will have to negotiate what should form each element of the closing accounts; for example, is there any restricted cash which the business cannot utilise? and, if so, is this to be excluded from any definition of ‘cash’?

A buyer should always consider whether it makes sense to pay cash for cash given stamp taxes or whether they should seek for the sellers to carry out a cash sweep to an agreed level pre-closing.

Locked box

In contrast, a locked box mechanism involves the parties agreeing the price before signing, requiring detailed analysis of the equity bridge and the underlying financial accounts – the locked box accounts – before signing. There is then no post-closing adjustment. Economic risk therefore passes on the locked box accounts date and the sale agreement should contain provisions to prohibit and allow pound for pound claims if there is ‘leakage’ of value from the target group to the sellers, unless such leakage is ‘permitted leakage’.

Leakage would often include a seller receiving dividends, management charges or supervisory fees (or similar) and transaction bonuses, as well as, for example, assets transferring to the seller, guarantees being provided in favour of a seller by the target, forgiving debt, or the target suffering tax in relation to any such item. Transaction costs payable by the target should also be factored in as it is for the benefit of the seller indirectly.

Permitted leakage is amounts which are allowed to go to the sellers, either due to a specific agreement (for example, for the target to pay a certain amount of advisory fees (which a buyer will likely want capped)) or which are made in the ordinary course of business, such as, the payment of employees’ salaries.

In addition to the locked box price, sellers of profitable businesses will seek compensation for the period from the locked box date to closing, to reflect that they have been running the business. This is the ‘value accrual’ or ‘profit ticker’.

Which to choose?

There are pros and cons of both mechanisms, and we have summarised some of these below.  We often see completion accounts used in a buyer driven market (other than in an auction process).

Completion accounts

Locked box

Disclaimer

This note reflects the law as at 15 July 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Lifecycle of a business – I want to sell my business: Share sale v asset/business sale?

• 2 July 2025
• News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve considered the main aspects of the lifecycle of a business from the beginning and you now want to sell….

I want to sell my business: Share sale v asset / business sale?

In the UK, the sale and purchase of a business can take one of two forms: a share sale or an asset / business sale. Which one you opt for will depend on various factors, including tax, the bargaining position of the parties, the reason for the sale, and so on.

This article briefly explains some of the key differences between the two options. For simplicity, we’ll assume that the company which runs the business is a private company limited by shares and that the purchase price is cash.

It’s worth noting that tax is often the key driver behind the structuring of any transaction. Although beyond the scope of this article, the parties should always seek specialist tax advice to ascertain the various tax implications that will arise on both a share sale and an asset sale.

Back to basics – who owns what?

In England and Wales, a company is a legal entity in its own right. This means that it can sue and be sued, own assets, and owe liabilities, in its own name.

The company is in turn owned by its shareholder(s) who each hold one or more shares in the company. The directors run the company on a day-to-day basis and are responsible for its management. They may or may not also be shareholders.

Share sale and asset sale: what’s the difference?

In a share sale, the buyer acquires the entire issued share capital in the company which runs the business (the target company) from the target company’s existing shareholder(s) (the seller(s)). As such, the purchase agreement (the share purchase agreement or SPA) will be entered into between the buyer and the existing shareholder(s); often, the target company will not be a party to the SPA at all. Essentially, the buyer is acquiring the entire business within a corporate / company wrapper. To an outsider looking in, there is no change to the actual business itself (i.e. the assets remain owned by the target company, any liabilities are still owed by the target company, any contracts that the target company has entered into remain in place and any employees remain with the target company), although it is common for the buyer to change the name and registered office of the target company and to change the directors. 

In an asset sale, the buyer acquires a bundle of specified assets and rights, and it may assume responsibility for certain liabilities and obligations, which together comprise the business. As it’s the company which owns those assets, rights, liabilities and obligations, the purchase agreement (the asset purchase agreement or APA) will be between the buyer and the company (as the seller). Asset sales allow the buyer to cherry pick which assets (and possibly liabilities) it wants to acquire.  

Pros and cons

Share sale

As a share sale effects a change in ownership at the level above the operating business (i.e. in the owner(s) of the shares in the target company), it enables the business to continue to operate without any disruption. There’s no need to transfer the individual assets and usually, no third party consent is required (unless any contracts include change of control provisions). As such, the sale can often remain confidential and a buyer can continue to benefit from any goodwill or reputation in the business. However, if there are a number of seller shareholders, they will all need to be on-board with the sale, and agree to and sign the SPA, which can result in added complexity.

A share sale can also provide the seller(s) with a clean exit (although in some transactions, a seller who is particularly important to the business, may retain some interest and involvement and the seller(s) is likely to be on the hook for any breach of warranty or indemnity claims for a period of time post-sale).

From a legal documentation point of view, a share sale can be more straightforward than an asset sale: it doesn’t require the transfer (novation) of any contracts required by the business from the seller to the buyer, nor does it require the parties to agree which assets and liabilities are being acquired and their individual purchase price.  

That said, because the buyer will be acquiring the entire business, warts and all, it is vital that the buyer does its homework and fully understands exactly what it’s buying. This exercise is referred to as due diligence, which is usually split between legal due diligence (completed by the buyer’s legal advisors), financial due diligence (completed by the buyer’s accountants or financial advisers) and commercial due diligence (completed by the buyer).

The aim of any due diligence exercise is to ensure that the buyer fully understands the business it’s buying and can make plans as to how this new business can be integrated into any business the buyer already owns. It also helps to flush out any skeletons in closets. This obviously creates risk in that the buyer could find out certain information which puts it off buying the company in the first place. If this happens, the buyer has various options; for example, it could:

• negotiate a lower purchase price with the seller
• request the inclusion of certain indemnities so that the seller will have to reimburse the buyer for any loss suffered in respect of specified events or liabilities post-completion
• retain part of the purchase price for a period of time post-sale to cover any claims it might have against the seller post-completion
• choose to walk away from the deal
• request that the transaction be restructured as an asset sale

Asset sale

With an asset sale, both parties are afforded more flexibility in terms of what they sell and acquire, than in a share sale; for example, the seller may want to retain certain assets or parts of the business, while the buyer may want to exclude undesirable assets or liabilities, thereby reducing its risk exposure.

However, this flexibility comes at a cost and an asset sale is often more complex than a share sale due to the need to identify and transfer each of the separate assets which are being sold. As the company itself is the seller, any contracts which the company has entered into which are being transferred to the buyer will require the approval of the other party to the contract. Any licences related to the business will also need to be transferred and any security which has been granted over any of the assets being sold will need to be released. Obtaining these approvals can prolong the transaction and make it more difficult to keep the transaction confidential.

Due diligence will still be required, to enable the buyer to determine what it actually wants to purchase and to ensure that any contracts, licences, etc. are dealt with accordingly, but it may not be as all-encompassing an exercise as for a share sale.

Fewer warranties and indemnities are usually given on an asset sale than a share sale (an advantage for the selling side), and it will be the seller company, rather than that company’s shareholders, which actually give them. This substantially reduces the shareholders’ liability risk (although the buyer may insist on certain individuals giving additional protection, such as personal guarantees).

A significant issue arises in asset sales where the business has any employees. These may transfer under TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006) (thereby cutting across the “cherry picking” benefits to a buyer of an asset sale). This can be complex and it’s vital that the correct procedure is followed, so specialist employment law advice should be taken if an asset sale is being undertaken and there are any employees in the business.  

Finally, don’t forget to consider where the purchase price will end up. In a share sale, the purchase price will be paid to the seller shareholder(s), whereas the purchase price on an asset sale will be paid to the selling company; that company’s shareholders will then have to decide how to move the cash out of the company. Legal and tax advice should be taken about this.

Conclusion

The structure of any business sale needs to be carefully considered by both sides to the transaction. There are advantages and disadvantages to both methods and although this note summarises a few of these, we recommend that legal and tax advice should always be taken as soon as possible if you are considering selling or purchasing a business.

If you have any queries about the above or wish to discuss your exit or an acquisition in more detail, please get in touch with your usual Forsters’ contact or any member of the Forsters’ Corporate team.

Disclaimer

This note reflects the law as at 1 July 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Lifecycle of a Business – 10 tips when joint ventures go wrong

• 14 May 2025
• News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…

10 tips when joint ventures go wrong

Parties often enter into joint venture (JV) arrangements with a sense of excitement and enthusiasm; the parties seem a perfect match, the individuals involved get on well together and the market looks promising: “Yes, we’ll put in place a basic shareholders’ agreement but there’s really no need; it’ll just be filed somewhere and never looked at again.” As lawyers, we really hope that’s the case too, but situations can and do change.

So, what can you do if the relationship breaks down or your JV partner is in breach?

(This article assumes that the JV entity is an English company and as such, refers to shares, shareholders’ agreements and so on, but the points are applicable to other JV arrangements too.)

1. What’s the problem?

Decide what the actual issue is (of course, there could be more than one). This may be straightforward (for example, your JV partner had a contractual obligation to acquire a licence and hasn’t done so) or it could be more complex, but, once you’re clear as to the main problem(s), you can then focus on how to deal with them.

2. Call on your legal advisors

Calling your legal advisors may be seen as a last resort, particularly in a dispute situation, but getting them involved early on can save time and money in the long-run. Not only will they be able to review the documents and let you know your options, but they may have other suggestions as to how to resolve, or deal with, the issue. Involving lawyers can defuse the emotion from the situation and focus everyone’s minds.

3. Does the shareholders’ agreement cover the problem?

Once you’ve decided what the actual issue is (see point 1), you should look at the shareholders’ agreement and see if it covers the problem. If your JV partner has failed to fulfil one of its material obligations, it will be in breach of contract and the shareholders’ agreement should provide for what happens in this situation.

While parties are often eager to get started with their new venture, it’s vital to put in place a comprehensive shareholders’ agreement as early in the arrangement as possible, precisely for this type of situation.

The agreement should set out the contractual relationship between the parties, including specifying each party’s obligations towards the JV and each other, how decisions will be made and the steps to take if a party wants to walk away, the parties are in dispute or the JV is to be terminated. Don’t be tempted to skip over these provisions when the shareholders’ agreement is being negotiated; it’s much easier to agree the process when the parties are amicable than when the relationship is breaking down.

4. Do you have any other remedies?

In addition to the terms of the shareholders’ agreement, you may have other legal remedies. If your JV partner is in breach of the shareholders’ agreement, you may have a breach of contract claim against them. If successful, this will usually result in the defaulting party having to pay damages to the non-defaulting party, but other remedies can include an injunction (which prohibits the defaulting party from continuing in its default; useful for example, if the party has broken its confidentiality obligations) or specific performance (which forces the other party to meet its contractual obligations; for example, where a party is obliged to obtain a third party consent and hasn’t done so).

There may be other claims available to you as well, including misrepresentation (where one party makes a false representation to you which induces you to act in a certain way) or claims for breaches of intellectual property.

Your legal advisors will be able to help here (see point 2).

5. Funding arrangements

Bear in mind the funding arrangements. If your JV partner provides some or all of the finance for the JV, what will happen to this if they dispose of their shareholding?

You also need to consider the terms of any third party funding in place. Having one JV partner leave the arrangement may, for example, be an event of default, although depending on the circumstances, you may be able to come to some arrangement with the funder.

6. Do you want to continue with the JV arrangement?

The answer to this is likely to depend on the situation. If, for example, one of the parties is in financial difficulties and is unable to contribute its share of the funding, but it also contributes know how and the relationship between you is still good, you may want to continue with the current JV arrangement and come to some agreement as to how to cover the other party’s funding obligations. However, if, say, the parties fundamentally disagree as to the future direction the JV business should take, it may be time to call it a day. 

7. Selling your interest

Typically, the shareholders’ agreement (or the JV company’s articles of association) will set out the process if one party wants to sell their interest.

At the very least, parties are likely to want a pre-emption right (a right of first refusal) to purchase the other party’s shares before they’re sold to a third party, but options are likely to depend on the parties’ relationship and their role within the JV. For example, a minority shareholder might not want to be forced into accepting a new majority shareholder so may insist on being able to sell their shareholding to any third party purchaser that the majority shareholder wants to sell to (a tag along right). Conversely, third party purchasers are unlikely to want to have to deal with a minority shareholder and so a majority shareholder might insist on having a drag along right, where they can force the minority shareholder to sell to any third party purchaser. Other sale mechanisms are likely to be included where the JV parties have an equal interest in the JV.

8. Forcing your JV partner to sell its interest

The shareholders’ agreement may include situations in which one party is forced to dispose of their interest, often when that party is in material breach of the shareholders’ agreement. A process will usually be set out, including how the shares will be valued. Bear in mind however, that the provisions may provide that you have to acquire the shares of a defaulting party, failing which the JV company has to be wound up. 

9. Keep open the dialogue

Ideally, continue talking with the other JV partner. Maintaining the relationship and talking about the dispute or issue causing the problem may lead to a resolution. If the problem boils down to a clash of personalities, the JV parties may be able to bring in new personnel to temper the situation. If the issue relates to a breach by one party, there may be a reasonable explanation behind the party’s actions.

Keeping the dialogue open, even when the JV arrangement is at an end, can ultimately reduce the amount of stress, number of man-hours and the amount of legal fees incurred in resolving the situation.

10. Maintain records

Keep a record of discussions held and emails sent between the JV parties. Not only can these be referred to at a later date to jog peoples’ memories or be used as evidence, they can also help your legal advisors to understand the situation and history.

The main takeaway from the above is to ensure that you have a detailed shareholders’ agreement in place from the outset of the JV arrangement. (If the JV entity is a limited liability partnership, an LLP agreement will be used instead. Where there is no corporate entity, the parties should still enter into a collaboration agreement or similar.)

Don’t shy away from discussing what will happen if the JV doesn’t work out; although contracts can’t cater for every eventuality, having a written process in place in case the relationship sours will make resolving the issue much more straightforward.

If you wish to discuss any of the above in more detail or think we may be able to help, please contact any member of our friendly Corporate team.

Disclaimer

This note reflects the law as at 14 May 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Lifecycle of a Business – CIGA and Company Insolvency – Suppliers’ Rights to Terminate and the Company Moratorium

• 7 April 2025
• News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…

CIGA and Company Insolvency – Suppliers’ Rights to Terminate and the Company Moratorium

We’ve recently considered transactions which might be reviewed if a company becomes insolvent. Continuing with the insolvency theme, this article looks at how the Corporate Insolvency and Governance Act 2020 (“CIGA”) may apply to insolvent companies.

CIGA significantly changed UK insolvency law, introducing measures designed to support businesses facing financial distress and to assist them with getting their financial position back on track.

Included among its key provisions are the restriction on suppliers’ rights to terminate contracts, the option of a moratorium, and the introduction of the Part 26A restructuring plan, which allows financially distressed companies to restructure debts using a court-supervised process. While this article examines the first two provisions in detail, the Part 26A restructuring plan is beyond its scope.

Contractual termination rights

When is termination restricted?

CIGA prohibits suppliers of goods or services from terminating a contract or taking any other adverse action solely due to a customer’s insolvency, regardless of what the contract stipulates. This includes clauses that automatically trigger termination upon insolvency (known as ipso facto clauses) or require supplier action, such as issuing a termination notice.

If a company has entered into an insolvency or restructuring process, suppliers cannot terminate their contracts based on the insolvency alone, provided that the company continues to pay for the goods or services supplied. This prevents a struggling company from being left in the lurch by its suppliers solely due to concerns about its financial situation, even though it is still able to pay for the supplies; if the company can continue to receive supplies and trade, there is a hope that the company will be able to recover its financial equilibrium.

It is also prohibited for a supplier to condition the continued supply of goods or services on the payment of any outstanding amounts or similar demands. This ensures that suppliers cannot exploit the financial vulnerability of an insolvent company by imposing unfair conditions for maintaining the supply relationship.

If insolvency proceedings have commenced, suppliers are prohibited from terminating a contract for breaches that occurred before the insolvency process if they failed to act on those breaches prior to the proceedings. While termination rights linked to pre-insolvency breaches are restricted during the insolvency process, suppliers can still bring claims for such breaches either before the insolvency process begins or afterwards, assuming that the company is still in existence.

It should be noted that these restrictions only apply downwards in the supply chain; for example, there is no restriction on a company terminating a supply contract with one of its suppliers because of the supplier’s insolvency.

When is termination permitted?

However, termination is permitted during the insolvency process if the insolvent company consents to it. A court may also allow termination if continuing the contract would jeopardise the supplier’s own solvency or cause the supplier “undue hardship”.

If a contract includes a clause allowing termination for convenience (i.e. termination without needing to provide a reason or prove fault), this right also remains valid during the insolvency process, as the termination is unrelated to the company’s insolvency status. Similarly, if a contract naturally expires during the insolvency process, the supplier is not obligated to renew or extend it; the obligation to continue the supply of goods or services under CIGA applies only while the contract remains in force.

While termination rights based on insolvency alone are restricted, other grounds for termination (such as non-payment or material breach) can still be exercised if they arise after the insolvency event. This allows suppliers to potentially terminate contracts if the insolvent company fails to meet its obligations post-insolvency.

Moratorium

CIGA introduced a temporary relief period for financially distressed companies, known as a moratorium. During this time, companies are protected from enforcement action by creditors, allowing them to focus on recovery efforts. However, the company still needs to pay any new debts incurred and certain restrictions are placed on its operations. The intention is to provide the company with some breathing space from the risk of creditors taking action, during which time the directors can take steps to try and make rescue a viable option.

The initial moratorium period is 20 business days, which can be extended for another 20 business days without needing approval from creditors. Further, lengthier extensions can also be added if, for example, creditor approval is obtained.

Although the directors will continue to manage the company during the moratorium, a licensed professional called a monitor will be appointed. The monitor oversees the process to ensure the company is using the moratorium correctly and assesses whether the company can be saved.

As part of the process which establishes the moratorium, the directors will need to certify that the company is facing actual or impending insolvency, while the monitor needs to be confident that the rescue of the company is likely. If, during the moratorium, the monitor concludes that the company is unable to pay its debts as they fall due or that the company cannot be rescued, they will end the moratorium.

Practical considerations:

In light of the provisions of CIGA, insolvent companies should bear the following in mind:

1. Maintaining supplier relationships:

An insolvent company should focus on maintaining good relationships with suppliers. Open communication about the company’s situation and plans for restructuring can foster goodwill and potentially lead to more favourable terms during the moratorium period.

2. Understanding contractual obligations:

While CIGA protects against termination for insolvency, it does not shield the company from other grounds for termination, such as non-payment or breach of contract. Therefore, it is essential for an insolvent company to remain compliant with its contractual obligations to avoid triggering these grounds.

3. Utilising the moratorium effectively:

The statutory moratorium allows an insolvent company to pause creditor actions while it seeks to restructure. Companies should strategically use this time to negotiate with creditors and suppliers, reassess financial commitments, and develop a viable restructuring plan.

Disclaimer

This note reflects the law as at 4 April 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

Lifecycle of a Business – When insolvency beckons: a company’s perspective – reviewable transactions

• 18 March 2025
• News

Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.

With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.

We’ve already discussed various topics, including funding, employment and commercial contracts, but it’s now time to discuss when things go wrong…

When insolvency beckons: a company’s perspective – reviewable transactions

We’ve recently discussed a director’s position when a company is facing financial difficulties. In this article, we consider transactions which might be reviewed if a company becomes insolvent.

Once a company enters formal insolvency, it is possible for historic transactions to be reviewed and challenged in certain situations, including where there has been a:

1. Preference;
2. Transaction at an undervalue; and/or
3. Transaction which defrauded creditors.

Preferences

Preference transactions occur when, prior to insolvency, a company unfairly favours one creditor over others by making payments or transferring assets that would place the favoured creditor in a better position if the company becomes insolvent, than they would have been otherwise.

For there to be a preference, the transaction must involve a company creditor or a guarantor of the company’s debts or liabilities.

Secondly, there must be a clear improvement in the creditor’s position as a result of the company’s actions. The company must have done something or allowed something to happen that placed the creditor in a more favourable position than they would have been in if the transaction had not occurred.

The third element relates to the intention behind the transaction. There must be evidence that the company actively intended to place the creditor in a better position. It is important to note that this intention is presumed if the transaction benefits a connected party, such as a director, family member, or associated business.

The transaction must also have occurred within a specific period before the company’s insolvency. For non-connected parties, this period is six months, while for connected parties, it extends to two years.

Lastly, the company must have been unable to pay its debts when the transaction occurred or have become unable to pay its debts as a direct result of the transaction.

Transactions at an undervalue

A transaction at an undervalue occurs when a company transfers assets or enters into agreements for significantly less than their true market value and the company was either unable to pay its debts at the time of the transaction or became insolvent as a direct result.

Timing is crucial; the transaction must have taken place within the two-year period prior to the onset of insolvency.

Intent also plays a significant role in determining whether a transaction is at an undervalue. If the transaction was entered into with the purpose of putting assets out of reach of creditors or prejudicing their interests, it is more likely to be considered a transaction at an undervalue. Courts often assess whether the transaction was made in good faith or if there were reasonable grounds to believe it would benefit the company or individual involved.

Transactions defrauding creditors

A transaction defrauding creditors occurs when a company transfers assets for less than their market value, with the aim of moving the assets beyond the reach of its creditors or otherwise harming their interests. While there must be an intention to place assets beyond the reach of creditors or adversely affect their interests, this intention does not need to be the primary reason for entering into the transaction.

Unlike other voidable transactions, there is no specific time limit for challenging a transaction defrauding creditors (although the Limitation Act 1980 will apply), and the company does not need to be insolvent at the time of the transaction or become insolvent as a result of it.

Additionally, it is not necessary to prove fraud in a technical sense, but there must be evidence of intent to harm creditors’ interests, as stated above. Claims can be brought by any affected party, not just insolvency practitioners, and can be initiated at any time.

Remedies

When a successful claim is made in relation to a reviewable transaction, the courts have a range of remedial measures at their disposal.

The court may order the return of property or sale proceeds to the company, release or discharge security provided by the company, or require new security to be given. Obligations that were previously released or discharged can also be reinstated, and new obligations may also be imposed.

In cases involving transactions at an undervalue or those defrauding creditors, the court may void the transaction entirely. This typically involves restoring assets to their original state or ordering payment equivalent to the value of the assets transferred.

Directors and other involved parties may face personal liability for these transactions, which can include financial penalties, such as fines or obligations to repay amounts to the company or its creditors. They might also be banned from serving as directors for periods ranging from two to 15 years, and in severe cases, they could face imprisonment.

Such offences can also lead to broader consequences, including damage to the company’s reputation and costly legal proceedings, ultimately impacting its financial stability.

Practical considerations

To reduce the risk of a successful claim in relation to a reviewable transaction, companies should implement a comprehensive set of practices, such as:

1. Fair Market Value and Professional Valuations:

Ensure all transactions are conducted at fair market value. Obtain professional valuations for assets being sold or transferred, particularly for substantial transactions.

2. Financial Transparency and Documentation:

Maintain financial statements, cash flow forecasts, and balance sheets to demonstrate the company’s solvency at the time of transactions. Keep thorough records of all transactions, including contracts and correspondence.

3. Corporate Governance and Board Approval:

Establish clear and consistent payment policies. Obtain consent and approval from the board of directors before transferring or selling business assets and consider including the justification / rationale for the transaction in the board minutes.

4. Equal Treatment of Creditors:

Ensure all creditors are treated fairly and avoid preferential treatment. Be particularly cautious about transferring assets to connected parties such as directors, family members, or associated businesses at prices below true value, as these transactions are more likely to be scrutinised.

5. Seek Professional Advice:

Consult with legal advisors and financial experts before entering into major transactions, especially if the company is experiencing financial challenges. Seek professional advice as soon as financial distress becomes evident. This can help evaluate the merits of a transaction.

6. Declaration of Solvency:

Third parties to transactions shouldconsider requesting a declaration of solvency from the company transferring the assets. This will provide some comfort that the company is solvent at the time of the transaction.

Disclaimer

This note reflects the law as at 14 March 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.