What directors of distressed businesses need to know - selling assets at the right price

It is a stressful and upsetting time for business owners when their business experiences financial difficulties. During this time, businesses will have to navigate a wealth of insolvency jargon that may seem intimidating or simply confusing.  As their attention moves from growth to survival, concerns about wrongful trading and personal liability come to the fore. Following on from my previous piece, I move onto transactions at undervalue.

Investigating the sale of assets

So when may an IP look into the sale of assets and whether they may be classed as 'Transactions at undervalue'? It is important to point out that any transaction that occurs up to two years prior to a business entering a formal process may be investigated. An IP could deem such sales to have taken place when a director knowingly sells an asset at less than its true value. This might be the sale of a 1 year old BMW 5-series company car in good condition for £5,000 to a friend or the sale of intellectual property to a related business for £1, or for no consideration at all.

So what can go wrong

There are a number of situations where directors can get into difficulties, even inadvertently finding themselves personally liable for business’s debt.  Excluding fraudulent trading and trading whilst insolvent (wrongful trading), the three actions that often trip up directors are misfeasance, gratuitous alienation and unfair preference. Our last article on what directors of distressed businesses need to know will look at unfair preference.

What if a director suspects their business may be insolvent

Special care must be taken not to fall foul of the terms of the Insolvency Act 1986.  First and foremost, they should seek the advice of an insolvency practitioner (IP) and progress steps to place the business into the appropriate insolvency process. This is all, of course, in addition to the duties of directors laid out in the Companies Act 2006.

Ignorance is no excuse

Common sense should make it obvious when these rules are being broken, but many directors make these mistakes on a misplaced assumption that they are acting within the rules or that they will not be found out.

Seek advice early

Early engagement with restructuring and insolvency professionals can prevent directors for potentially being personally liable for company debts - it could even avoid an insolvency altogether.

Kevin Lamb is a Chartered Accountant and Director at RSM Restructuring Advisory, based in Scotland.