Restructuring a company can often involve transferring assets from it to another entity.
When considering this, it is important for directors to consider not only their own duties to the company but also whether the ‘removal’ of an asset can be set aside or challenged at a later date. For example Company A owns a property without any charges registered on it, valued at approximately £500,00. Company A owes debts of £250,000 which it cannot pay, without selling the property. The directors are considering transferring the property to Company B and placing Company A into liquidation.
Once Company A is placed into liquidation a liquidator may be appointed and part the liquidator’s role is to realise all of the assets and liabilities of the company and, where possible make a distribution to creditors. A liquidator should also look into the affairs of the company, and in particular the conduct of the directors prior to its insolvency. The term ‘directors’ does not only include those who are registered at Companies House, but also individuals who take an active part in the management of the company, who may be considered to be shadow or defacto directors. Directors who have acted improperly may have to reimburse the insolvent company and/or face director disqualification proceedings.
In relation to Company A and Company B mentioned above, unless market price is paid by Company B to Company A, it is highly likely that the transaction can be set aside as a transaction at an undervalue. The property would therefore be transferred back to Company A and the liquidator would be able to sell it, pay his fees and then make a distribution to Company A’s creditors. It is not uncommon in these circumstances for Company B to claim that Company A owed it money and it has accepted the transfer of the Property in settlement of the debt. Even if there was a valid debt which equalled the value of the property, it is highly likely the liquidator will be able to set aside this transaction on the basis that it is a preference. This is where one creditor is preferred over the interests of others.
Whilst it may be easy to foresee the pitfalls when considering a property, it can sometimes be more difficult, when you consider more intangible items such as a trading name, Intellectual property rights, third party contracts, client lists, good will, stock etc… A director who allows another entity to use any items which belong to an insolvent company or a company that becomes insolvent is potentially in a difficult position and in breach of his fiduciary duties. Legal advice should always be sought before transferring or allowing the use of any assets by another entity, where there may be a pending insolvency.
We regularly work with Insolvency Practitioners and can assist with any such problems.