If your company is facing financial difficulty and you believe it is no longer viable, it might be tempting to move or sell some of the assets to try and protect them. However, this is never a good idea.
When a company is insolvent, the directors must act in the best interest of the creditors – which means maximising their returns. As such, you must be careful not to sell your assets at an undervalue.
Doing so could be a possible breach of s238 of the Insolvency Act 1986, so read on to find out more about transactions at undervalue, what happens if they are discovered, and how to sell assets legally…
Here’s everything you need to know about transactions at undervalue:
What is a transaction at undervalue?
A transaction at an undervalue is referred to as s238 of the Insolvency Act 1986. Essentially, a company can be in breach of s238 if assets are sold below their proper value while the company is insolvent and is probably going to end up in administration or liquidation. Doing so can result in serious repercussions for company directors.
When a business becomes insolvent, one of the duties of the appointed insolvency practitioner (IP) is to identify whether any transactions at undervalue have been carried out.
They are able to go back two years or more from the date of insolvency in their search, and if they find anything, they have the right to apply to the court for the transactions to be reversed.
Examples of transactions at undervalue
A transaction at an undervalue can include the following:
- Assets that are gifted to someone connected to the business where no payment is made in return
- Assets are transferred to a director in lieu of their loan account for less than they are worth
- Assets that are gifted or transferred to an independent third party with no payment made
- Assets that are sold for a vastly reduced sum – or one that is considerably lower than its true market value
- Where a director has allowed a charge over all of an asset for considerably less than the value of that asset
How a transaction at undervalue is identified
When a company enters administration or liquidation, the appointed IP will closely analyse all the financial documentation to identify whether any questionable transactions have taken place.
The directors’ conduct in the time leading up to insolvent will be scrutinised, and if any such transactions are found, the IP will investigate further.
In this instance, the directors will be interviewed, and a report will be sent to the Secretary of State, who will decide if further action is necessary.
During the interview, the directors must explain why the transaction took place and the reasoning behind it, so the IP can establish whether company assets were deliberately diverted away from creditors.
Any formal action will be undertaken by the Insolvency Service, who act on behalf of the Secretary of State, and there is a period of two years during which the Insolvency Service can pursue court action against any director suspected of unfit conduct.
Additionally, the administrator or liquidator also has the power to reverse these transactions and can apply to the court for a reversal that returns the company’s finances to the position prior to the transaction.
What does this mean for you, the director?
These types of transactions go directly against the principles laid out in the Insolvency Act, and can greatly reduce the amount of money available to repay creditors.
As such, they could be deemed actions of fraudulent or wrongful trading, which carry severe penalties such as:
- disqualification as a director for 2-15 years
- personal liability for some or all of the company’s debts
- prosecution and even a potential prison sentence is serious unlawful conduct is identified
As we said above – it’s never a good idea!
So, how can you sell assets properly?
If you are planning to sell any of your company assets, the best thing to do is to get them independently valued by a RICS qualified valuer or surveyor.
Any proceeds should be banked to maximise the interests of company creditors, and you should also keep careful records of any transactions and ensure that all transactions are formally approved by the board.
Finally, financial records such as sales documentation should also be retained for a prolonged period of time.
Need further advice?
For additional help and advice surrounding transactions at undervalue, be sure to contact McAlister & Co today. As licensed insolvency practitioners, we can provide practical advice to help you protect your assets and act in the best interest of your creditors.
It can be a complex area, and a transaction at an undervalue can have the potential for serious consequences. So, it’s incredibly important to ensure you understand both the nature of these transactions and the potential implications too.
Call us on 03300563600 for further help and advice.