In these risky times for business, what are the legal risks of protecting assets by transferring them between companies?
With the challenges faced by businesses many both large and small are considering how best to secure assets. Personal liability can result for directors if you get it wrong. You may be asking yourself when you might do this and how is this done effectively? We explain below.
How is the transfer of assets achieved effectively?
There are 2 basic approaches:
- Transfer the assets to other members of your group or to other companies – but there can be risks as we explain below; or
- De-risk by using the company’s own resources to cover the transfer of assets.
We explain both approaches below.
Transferring assets to group or other companies
In all cases involving the transfer of assets the key areas to avoid are:
Transfer of assets at an undervalue
The transfer of assets at an undervalue within 2 years of liquidation – if cash or any other assets is moved to another group company or other company for nil or less than its worth this is known as a “transaction at an undervalue”. For example, if there is a brand and other intellectual property such as copyright – the transfer for zero consideration is at an undervalue.
A preference is where a creditor receives preferential treatment as compared with the other creditors. Often the creditors are the directors who pay themselves before others or the directors cherry pick who to pay first.
Putting assets out of reach of creditors at any time
If assets are moved specifically for the purpose of putting them beyond the reach of creditors or of otherwise prejudicing the interests of creditors this may be regarded as fraud. There is the risk of personal liability.
If one of the above apply the court can make an order to set the transaction aside – i.e. undo it so that the benefits behind the transfer are lost. Different time limits apply to each risk area.
How to avoiding challenges from liquidators
The transfer of assets should be safe from challenge by a liquidator if it can be shown, either :
- The company entered into the transaction in good faith and for the purposes of carrying on its business;
- There were good grounds to think that the transaction would benefit the company; and
- The buyer of the assets was not also a creditor of the company.
- The transfer was paid for using the company’s resources such as profits which have been built up for distribution among shareholders and/or share capital.
In any case:
- Transactions will be safer if done 2 years before the onset of insolvency; and
- Not at a time when the company is already struggling to pay its debts; and
- Does not leave the company becoming unable to pay its debts.
How to de-risk the transfer of assets
Generally speaking, the easiest and safest way to avoid your transfer of assets being unpicked by creditors or the liquidator is to use the company’s own resources. The steps should be taken in good time before financial difficulties arise.
When can you de-risk the transfer of assets?
There are several ways of transferring assets and de-risking. The most common are:
- Transfer the assets by way of a dividend from one company to another. This is the simplest structure for transferring assets provided the company has enough profits to do it – known as distributable profits. There is no risk of unpicking if the distributable profits are sufficient so this is very popular; or
- Reduce the company’s share capital and at the same time transfer assets to another company. There is no profit requirement but it will still be important to make sure the transfer or demerger does not affect the company’s ability to pay creditors.
- Transfer assets via the transfer of shares. Another option is to swap shares in the company for shares in another one. So long as no actual money or other consideration changes hands and the values are the same the transaction should be effective.
Practical steps to consider when transferring assets before insolvency arises
Where future insolvency is a potential risk, as well as timing being crucial, there are a few practical sensible steps we always recommend taking before transferring assets:
- Get evidence of solvency – the accountants or auditors can produce a report confirming the company is currently solvent and will not become insolvent as a result of the transaction;
- Collecting evidence as to motive – collect as much evidence as possible demonstrating that the basis for the transaction was to carry on the company’s business and that there were good reasons for thinking that it would benefit the company; and
- Paperwork – the board minutes approving the transaction should clearly set out that the directors carefully considered the merits of the transaction and document their motives.
Paperwork may be tedious but these days is expected.
Example of when a transfer of assets can work
X Limited has struggled during the down turn and the profits have slumped. Cash reserves are still reasonably healthy and all its bank obligations have all been satisfied. However, the directors have now come to the realisation that the factory, some freehold offices and some investment properties owned by the company are all potentially at risk from creditors if things do not improve.
One option would be to create a new holding company to own all of the shares in the trading company. All of the property could then be transferred to the new parent company (subject to any third party consents which might be required together with other formalities). After completion, the shareholders would own shares in the parent company and a group would be formed.
Will there be tax to pay on the transfer of assets?
In many cases assets can be transferred without triggering tax charges for the business or its shareholders. But, thought and planning is needed as the HMRC rules are intricate. As is the case these days if HMRC can find a way to assess tax they will. Our team includes specialists in this area who can guide you.
A master at turning what looks to be a tricky problem at the start with lots of dark alley ways into a workable commercial outcome.