A recent case published by the Insolvency Service has highlighted the fate that can await directors who play fast and loose with their company’s assets. In this case, the result was disqualification from acting as a director for six years after selling £1.5m of assets to a connected company for £500k, including seven vintage classic cars worth £101,500 sold for just £1. The Official Receiver, as Liquidator of the disadvantaged company, has confirmed that they are currently exploring options to pursue recovery action to return money to creditors who lost out as a result of the undervalue sales, which is likely to be a prosecution under Section 238 of the Insolvency Act 1986.
We have previously explored the issues associated with Transactions at an Undervalue (TUV), and identified these particular two downside risks of deliberately selling assets too cheaply – disqualification and personal liability for the directors involved.
Awareness for all directors
One of the most frequently suggested solutions to a financial crisis at a company is to look for surplus or under-used assets, which can be turned into cash. The urgency of the situation or if the buyer becomes aware of that the company may be a forced seller can lead to disappointing sales proceeds. This is completely understandable.
Nevertheless, directors need to take some basic steps to protect themselves in this scenario:
- Get an independent professional valuation of the assets if possible
- Sell through an independent intermediary
- Take professional advice on the company’s financial situation
- Document the basis for the decision to sell
The reason for the disposal of assets is key to the risk of an accusation of undertaking a TUV. Easing cash flow pressure is not only excusable, but an essential part of a director’s fiduciary duty. Putting assets beyond the reach of creditors, effectively ‘dumping’ a company’s debts and deliberately increasing creditor losses by doing so will always risk attracting the sort of punitive action against a director, which has occurred in the TUV case.
Connected party sales
Establishing guilt in a TUV prosecution depends to a large extent on whether or not the company was insolvent at the time of the disposal. Section 238 requires that the transaction must have taken place within two years of the commencement of Administration or Liquidation, but at a time when the company was unable to pay its debts or became unable to do so because of the transaction.
If the buyer of the assets is a connected party, then it is presumed that the company was unable to pay its debts at the time of the transaction, so the burden of proof moves to the directors, who must then satisfy the court that the company was solvent at the time. The director in the TUV case controlled the purchasing company.
Re-use of a company name
In the case referenced above, the assets were moved to a connected party in what may have been an attempt to continue a struggling business by disadvantaging the original company’s creditors. This possibility may eventually be tested in court.
What does not seem to have occurred was the transfer of the name of the company, but this is not unusual when a business fails but is rescued by another entity, especially when that is a connected party.
It is worth remembering that Sections 216 and 217 of the Insolvency Act 1986 prohibit the re-use of a Company name following its insolvent Liquidation, without first obtaining court consent.
There are considerable downside risks to flouting this requirement. The guilty party can face being:
- Prosecuted and, if convicted, imprisoned and/or fined, and sometimes an order to confiscate the proceeds of crime will be made
- Disqualification for up to fifteen years from being a Director
- Made personally responsible for debts incurred during the time they managed a Company using the prohibited name
At Opus, we have extensive experience assisting business owners and directors with concerns and challenges, and we will always work with you to find the best solution for you and your business. If you would like to speak to Opus, one of our Partners would be more than happy to have a non-obligatory, confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our specialists.