When selling a business, insolvency practitioners may decide to enter into an exclusivity agreement with a potential purchaser to allow for a sale to be negotiated further. When doing so, it is desirable to document the parties’ expectations and the material terms in writing, most commonly in a heads of terms document.
The recent ruling of Lord Sandison in ATE Farms Limited v AW Estates Scotland Limited [2023] CSOH 73 illustrates the importance insolvency practitioners should place on the heads of terms agreed between the parties prior to any sale.
The facts
A papermill owned by AW Estates Scotland Limited (“AWESL”) and Arjowiggins Scotland Limited (“AWSL”) experienced financial difficulties in recent years and both AWESL and AWSL fell into administration in September 2022. The administrators decided to sell the papermill and negotiated a sale of the mill site, its machinery and assets to ATE Farms Limited (“ATE”). A ‘Deposit and Exclusivity Agreement’ (“DEA”) was entered into between ATE and the administrators.
Pursuant to the DEA, a deposit of £300,000 was paid by ATE to the administrators’ solicitors and a period of exclusivity was granted within which the administrators would not negotiate with other potential purchasers.
It was agreed between the parties that they would both act in good faith and work expeditiously towards concluding a sale on the basis of the heads of terms previously agreed. In the event that the sale did not complete by the agreed date, the deposit would be forfeited unless the sale had not concluded due to a breach of the DEA by the administrators.
The sale eventually fell through and ATE sought to recover their deposit on the basis that the administrators breached the terms of the DEA. The administrators sought certain environmental indemnities from ATE which covered all liabilities under the Environmental Protection Act 1990. These indemnities would cover the mill site and a site where the mill dumped its waste. As ATE did not intend to purchase the waste site, they refused to grant indemnities over the waste site.
The heads of terms included environmental indemnities but the parties disagreed on the scope of the heads of terms.
The parties’ positions
ATE’s position was that as the mill site was the only site that was being purchased, the environmental indemnities would be limited to that site only.
The administrators’ position was that ATE had verbally agreed to take on all environmental liabilities and as ATE had agreed to take on the waste management licences of the mill, of which certain licenses related to the dumping of the mill’s waste at the waste site, ATE was aware that they would need to provide environmental indemnities in relation to the waste site also. In addition, the administrators argued that this was reflected in the reduced purchase price and in any event, it is standard practice in insolvency contexts for purchases to be on an ‘as seen’ basis and grant indemnities in relation to the same.
ATE put the administrators on notice that the sale would not go ahead if the administrators did not agree to excluding the environmental indemnities in relation to the waste site. As such, ATE issued proceedings against the administrators for breach of their duty to act in good faith and for return of its deposit.
The decision
The Court of Session in Scotland decided that whilst the administrators’ duty to act in good faith had not been breached, the scope of environmental indemnities pursued by the administrators was not a part of the heads of terms. As such, the administrators delayed the completion of the sale, breaching their duty to act expeditiously to complete a sale based on the agreed heads of terms.
The Court of Session ordered the administrators to refund ATE’s deposit.
Comment
In light of this decision, insolvency practitioners would be well advised to pay as much attention to the heads of terms as they would to any final sale agreements. The heads of terms should document, to the fullest extent possible, the scope of any material terms such as indemnities. Failure to do so could lead to disagreements between the parties and could cause a sale to fall through, sometimes with adverse consequences which lead to unnecessary litigation and costs as evidenced in this case.