Companies facing financial difficulties and concerned about falling into insolvency will sometimes consider it a good idea to sell or transfer company assets swiftly in order to protect them.
However, due to there being a requirement for company directors to maximise creditor returns in insolvency, such action could be considered wrongful or fraudulent trading.
What is a transaction at undervalue?
A transaction at undervalue refers to the sale or transfer of assets at a rate unreflective of the true market value. When assets are moved or sold in this way, solicitors who deal with insolvency will warn that any insolvency practitioner will consider it suspicious.
Solicitors that specialise in insolvency will tell you that insolvency practitioners will closely analyse all company transactions, as it is their job to highlight any that are questionable. Administrators or liquidators have the power to apply for a court order to reverse any such transaction and restore the situation to where it was prior to the transfer or sale having taken place.
An insolvency practitioner may track back up to two years before a company went into liquidation or administration. If they find evidence of a significantly reduced value having been placed on any one asset than would have been the case if it had been valued by a professional; or of gifts made with no associated payment, then they will be duty bound to make a report to the Secretary of State.
What are the penalties for undervalue transactions?
Any sale of assets undervalue will be considered a breach of the Insolvency Act 1986 and solicitors who deal with insolvency will be quick to warn that directors involved in activities like these could face financial penalties as well as the possibility of criminal prosecution. Something to bear in mind is that directors can be held personally liable for some or all company debts and may be disqualified for up to 15 years if accused of wrongful or fraudulent trading in insolvency.
Avoiding Accusations of Selling Assets at Undervalue
The key message is that because selling or passing on assets at undervalue reduces the amount of money available to pay creditors, which of course is very serious, directors must think carefully before using this as a way to protect assets. Creditor interests should always come first and in order to avoid accusations to the contrary, directors should follow a formal procedure for selling or transferring assets.
Solicitors that specialise in insolvency will suggest that the process starts with a board meeting where all agreed action is carefully documented. A RICS qualified surveyor or valuer should be engaged to make sure that going concern and forced sale values are provided. Then, once assets have changed hands, the funds should be banked without delay with full records retained for several years following the statutory time requirement.