What if we sell the company's assets to another company, then knock the insolvent company over?
Definition of a transaction at an undervalue
Simply, a transaction at an undervalue is where assets belonging to a business are sold, or transferred to a third party, at significantly below their true value or for no consideration at all. The transaction becomes a problem if the company is insolvent, as any transfer at an undervalue is in effect depriving the creditors of money owed to them. This is outlined in s238 of The Insolvency Act 1986.
So how does it happen?
If the company is no longer viable, and the directors believe that the company has no future, it may be tempting to "move" or sell some of the assets across to another trading company or partnership or individual.
Examples of this include;
- Transferring an asset, such as a machine, from one company to another without any payment
- Granting access to a company database or client list to another company for free
- Allowing a connected party to use brands, Intellectual property for no charge.
- Selling any asset for significantly below market value.
- Transferring company vehicles to individuals without payment.
The first warning is think carefully before doing anything similar to the above!
If the company has assets that actually belong to say a bank or Hire Purchase company, then these assets must not be sold or transferred without their explicit written approval.
s238 of The Insolvency Act 1986 applies in the case of a company where -
(a) the company enters administration or (b) the company goes into liquidation and "the office-holder" means the administrator or the liquidator, as the case may be.
Where the company has at a relevant time (typically 2 years if a connected party and 6 months if an unconnected party) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section, the court shall, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction. So the Court can reverse that sale or movement of assets.
What are the consequences for directors if they break the rules
Following an investigation by an insolvency practitioner a director/s may face;
- Personal liability for the company debt if the asset's true value cannot be recovered.
So how do we sell or move assets?
Properly! If there is a plan to sell any asset, then the safest policy is to get the asset(s) independently valued, make sure that the valuation has going concern and forced sale values. Typically you should use a RICS qualified valuer or surveyor to perform this task. Then we suggest that the assets are sold at or about forced sale values and the consideration banked to maximise the interests of the company's creditors.
Keep careful records of such transactions and it's probably best if a board meeting minutes the transactions as being formally approved by the board.
What if we cannot afford to buy the assets?
We suggest that you liquidate the company and then offer to buy the assets over time (deferred consideration) from the liquidator. DO NOT remove the assets thinking that there is no harm. Remember the directors may be made personally liable for the company debts if they have been wrongfully trading!
What if we hive across the assets or the business to another company?
This is a complex area of law that requires more details than a simple "what if" question, however the basic principles above apply. Hive across assets ONLY after proper legal advice and values have been established and a consideration paid by the other company.
It is vital that you take all reasonable steps to protect the assets of the business, to conform with the law and act in the best interests of the company's creditors. Remember, if you have any doubts or questions about the above brief guide please contact us on 08009700539