31/03/2023·4 mins to read
Receivers getting the ‘best price’: to market, or not to market?
The New Zealand High Court in Reynolds v Finnigan delivered a timely reminder about the steps receivers should take to obtain the ‘best price reasonably obtainable’ in a receivership sale.
Wherever possible, receivers should follow best practice when conducting receivership sales. This will involve obtaining an independent valuation, appointing a reputable agent, marketing the assets over a reasonable period and by appropriate means, and conducting a competitive sale process.
However, in some cases a more limited process may be warranted. The advantages of conducting a full on-market process may be balanced against the risk of losing value of a business while conducting a sale process.
Where a full on-market process will not be pursued, the utmost care should be taken to ensure that the more limited process will still prove that the best price reasonably obtainable is obtained. This may include obtaining a robust valuation, and/or engaging in a “soft” marketing campaign. Each case will be fact-dependent but, ultimately, sufficient steps need to be undertaken to overcome the information disadvantage of not going to market.
Reynolds - the facts
The Learning Ladder Limited (TLL) operated an early childhood education centre (Centre), which it acquired for $430,000 in 2015. The directors and shareholders of TLL were Ms Young and Ms Walker. Ms Walker was also a director and shareholder of another company, Red 9 Limited (Red 9), which lent $430,000 to TLL to purchase the Centre.
Following a breakdown in the relationship between Ms Young and Ms Walker, Red 9 called in the loan and appointed receivers to TLL. The receivers:
obtained an appraisal of the market value of the Centre from a registered business broker of around $388,000 (the appraisal was not a “fully-fledged valuation assessment” and was prepared in approximately three hours); and
gave each of Ms Young and Ms Walker an opportunity to bid for the Centre.
Seemingly, no further valuations, or marketing steps, were undertaken. Ms Young made a conditional offer to purchase the Centre for $426,800. Ms Walker (through a new company) made an unconditional offer to purchase the Centre for $470,000. The receivers accepted Ms Walker’s higher offer.
Under the Receiverships Act 1993 (Act), receivers have a duty to obtain the best price reasonably obtainable as at the time of sale. While the case does not go so far as to consider whether that duty was breached, a key question before the Court was what the best price reasonably obtainable at the time of sale was. Did the receivers achieve it? If it was materially more than the actual sale price, this may have caused TLL and its shareholders loss.
What was the best price reasonably obtainable by the receivers?
The Court first considered what the market value of the Centre was, and determined (based on expert evidence) that it was between $696,000 and $714,000 - considerably more than the sale price.
However, the best price reasonably obtainable is not necessarily the market value. Rather, market value will only inform the best price reasonably obtainable. If a receiver has taken all reasonable steps, this will be cogent evidence of the best price reasonably obtainable. Best practice, as to those reasonable steps, will be to:
appoint a reputable agent to market the property;
obtain a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property;
market the assets over a reasonable period of time (including by undertaking an extensive advertising and promotional campaign in appropriate media); and
conduct a competitive sale process (eg an auction or tender).
However, in some cases, a more limited process may be warranted. While, all things being equal, going to market for a value assessment will give the best indication of value, the Court noted that it must be balanced against the risk of devaluing the business in a sale process.
The risk factors involved in any case will be fact-dependent, but typically will include the costs of a prolonged sales process and of trading the business in receivership, and the difficulty of preserving the value of the business.
In relation to the Centre, there were legitimate concerns that a full marketing process might not be conducive to achieving the best price reasonably obtainable, as:
the value of the Centre may be sensitive to instability among the staff and customer base;
the time needed for a full marketing programme may have made the preservation of business value difficult in the circumstances (given cashflow pressures and uncertainty with Ministry funding); and
the continued dysfunction between the owners was already having a destabilising effect on the business.
While those concerns were valid, and the Court concluded that a full marketing process was too risky in the circumstances, it is apparent that the receivers had nevertheless not done enough to obtain the best price reasonably obtainable at the time of sale. The Court described the sale process conducted by the receivers as “limited and hasty”. Notably:
an owner of a competing early childhood centre had expressed interest, but this was not properly investigated;
the receivers had access to a database of pre-qualified buyers that could have led to a short “soft” marketing campaign, but this was not used;
the appraisal of market value was unreliable. It was rushed and included errors that the receivers ought to have recognised. The reliability should have been questioned given the appraisal of $388,000 was significantly less than the 2015 purchase price; and
although the Centre was offered to Ms Young and Ms Walker, the offer process was too shallow, and too short, to be reliable.
Ultimately, the Court determined that the best price reasonably obtainable at the time of sale was between $625,000 and $643,000. The Court arrived at this value by deducting approximately 10% from the market value to represent broker commission and receivership costs over a four week period in an alternative sale process.
In most cases, where a full market process will not be conducted, receivers would be wise to obtain robust independent valuations, and/or engage in a more limited “soft” marketing process. Failure to do so may be interpreted as a failure to overcome the information disadvantage of not going to market.
Special thanks to Daniel Bowman for his assistance in writing this article.