Insolvency risks with transferring company assets

It is not unusual and there is nothing inherently unlawful for companies in a group structure or with common or related ownership to transfer assets between them. There are often sound business reasons for creating a group structure. However, there are inherent risks where assets are transferred when a business is in financial difficulties or has significant debts.

Transferring assets where there is a possibility of insolvency is highly risky. Personal liability can result for directors if you get it wrong.   You should always ask yourself, as a company director,  are you being fair to creditors, what are the legal risks and and can you reduce those risks?

What are the risks of transferring assets from a business with financial issues?

You should first realistically assess how bad a financial position your business is in (if the business might already be insolvent you should think very carefully and if likewise if you the business has significant long term debts and is not doing well) and, importantly, your motivation for transferring assets. The next question, where you may be considering moving assets between group companies is how you value the asset. There will be legal and tax implications to consider and it is highly advisable to seek advice.

Transfer of assets at an undervalue

One of the the main risks of transferring assets between related companies is that, on liquidation, the appointed Insolvency Practitioner has a legal duty to consider the directors conduct in the period leading up to insolvency. He or she will certainly look at any transfer or sale of assets within 2 years of liquidation. If cash or any other assets are moved to another group company or other company or individual for nil consideration or less than the true market value, the transaction is likely to be scrutinised by the Liquidator.

On liquidation, directors will be formally required by the Insolvency Practitioner to explain why the transaction took place, the rationale and whether or not the transfer was part of deliberate actions intended to disadvantage creditors. Where an IP decides that a transaction was at an undervalue, the legal implications may include :-

• a reversal of the transaction, which is within the power of the Insolvency Practitioner.
• reporting directors to the Secretary Of State which can result in director disqualification for between 2-15 years, personal liability to contribute to all or part of the company’s debts, a fine and possibly even being criminally prosecuted for fraud.

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 minimise director personal liability risk

A sale or transfer of assets will be less likely to be challenged by a liquidator if it can be shown that 1 or more of the following apply :-

• Good faith - The company entered into the transaction in good faith and for the purposes of carrying on it's business and there were good grounds to think that the transaction would benefit the company;
• 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;
• Ensure you document the decision making - the board minutes approving the transaction should clearly set out that the directors carefully considered the merits of the transaction and document their motives.

Golden rules

With any intra-company asset transfers the following are important ways to mitigate the risk of a later challenge on liquidation :-

• Transactions will be safer if done 2 years before the onset of insolvency;
• Be wary and take advice if entering into any asset sales when the company is already struggling to pay debts;
• Always consider on what basis assets can be transferred either at no cost or at less than market value. It is usually highly advisable to seek some form of independent valuation of what is "market value".
• make sure that any transaction does not leave the company unable to pay its debts.

How to de-risk the transfer of assets between group companies

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.