Updated: 6th May 2020
On 28 March 2020, the Government announced new insolvency measures to support businesses under pressure as a result of the coronavirus outbreak. The Government will amend insolvency law to give companies breathing space and keep trading while they explore options for rescue and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months. You can find out more here. Directors must still be mindful of their fiduciary duty to creditors and shareholders and early advice is always the best protection against any criticism.
If your company is struggling financially and you fear a decline into insolvency, you may assume that it is a good idea to protect company assets by selling or transferring them quickly.
This is a dangerous assumption, however, due to the requirement for company directors to maximise creditor returns in insolvency. The sale or transfer of assets in this way could be construed as wrongful or fraudulent trading if later investigated.
A transaction at undervalue is the sale or transfer of an asset at a price that does not reflect its true value. Selling or moving assets in this way will raise questions from any insolvency practitioner appointed to administer your insolvency process.
Part of an IP’s remit is to scrutinise all company transactions and identify any that are questionable in their nature. An administrator or liquidator has the power to apply for a court order that would reverse the transaction, so restoring the situation to what it was if the sale or transfer had not taken place.
Generally going back up to two years prior to entering administration or liquidation, an IP could regard the following types of transaction to be at undervalue:
Protecting company assets in this way is a breach of the Insolvency Act, 1986. Directors can face financial penalties and even criminal prosecution in the most serious cases.
When a company goes into administration or liquidation, one of the insolvency practitioner’s duties is to investigate the conduct of all directors in the time leading up to insolvency.
Directors’ actions are scrutinised to identify any instances of unfit conduct, or measures taken by them that may have reduced creditor returns. Directors will be interviewed and a report sent to the Secretary of State, who then decides whether further action against a director is necessary.
Any formal action to be taken will be placed in the hands of the Insolvency Service, who act on behalf of the Secretary of State. They have a period of two years in which to pursue court action against any director they suspect of unfit conduct.
These types of transaction reduce the amount of money available to repay creditors, and go directly against the principles laid out in the Insolvency Act, 1986. They could be deemed actions of fraudulent or wrongful trading, both of which carry severe penalties including:
The main message is to think twice before trying to protect company assets in this way, and take seriously the obligation to put creditor interests first.
Directors planning to use the pre pack administration process may be thinking of transferring assets to a new company. Assets that are not wholly owned by the company – on hire purchase or lease, for example – need the full written agreement of the lender prior to transfer or sale in order for the transaction to be legitimate.
Directors need to make sure that a formal procedure is followed prior to the sale or transfer of assets in these circumstances. Best practice would be to hold a board meeting, during which minutes are taken to document all agreed action in this respect.
This may provide some protection for individual directors, as it shows intent to gain full board approval for their decision.
The most important consideration is to hire the services of a RICS qualified surveyor or valuer, to ensure that forced sale and going concern values are provided. Once sold, preferably at forced sale value, the cash should be banked immediately and full records of the sale retained for several years after the statutory time requirement.
If you are concerned about the sale or transfer of an asset, or need guidance on how to proceed if you are struggling financially, call our expert team. We can arrange a same day consultation free of charge, and We have an extensive network of 77 offices offering confidential director support across the UK.
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