In the tumultuous landscape of corporate finance, the pressure on directors to protect company assets during times of financial distress can be immense. However, the hasty sale or transfer of assets at undervalued prices (Transactions at Under Value) can have severe consequences. Despite being often seen as a safeguarding measure, Directors need to understand the implications of such actions, as they could face disqualification if found to have breached their duties.
Understanding Transactions at Undervalue
A transaction at undervalue refers to the sale or transfer of an asset at a price significantly below its true market worth. This can involve various scenarios, including:
- Gifts to Connected Parties: When assets are transferred to individuals connected to the business, such as family members or other directors, without any payment in return.
- Transfer to Third Parties: Assets being transferred to independent third parties without adequate consideration.
- Sale Below Market Value: Selling an asset for a sum substantially lower than its fair market price.
Investigations
These transactions come under intense scrutiny, especially if a company faces insolvency. Insolvency practitioners will meticulously examine all company dealings. If they uncover transactions at undervalue, they have the authority to seek court orders to reverse these actions.
Directors involved in such transactions are subjected to rigorous investigation. They must provide detailed explanations for their actions and justify the decisions made. Any indication of misconduct or an attempt to jeapordise creditor returns, whether intentional or not, is taken seriously. Ultimately, it may lead to legal repercussions under the Insolvency Act, 1986.
What are the implications?
Transactions at under value can be construed as misconduct in directors’ disqualification proceedings. Potentially leading to disqualification for a period ranging from 2 to 15 years. While there isn’t a direct monetary penalty for such transactions, if found guilty, directors may be ordered by liquidators or administrators to reimburse the funds. Additionally, if legal action is pursued to recover these funds, directors may be liable for the associated legal costs.
These transactions diminish the funds available for creditor repayment and go aganist the principles outlined in the Insolvency Act of 1986. They may be interpreted as fraudulent or wrongful trading, carrying severe consequences. Including fines, personal liability for company debts, directorial disqualification, and even criminal convictions.
The key takeaway is clear: prioritising creditor interests is paramount. Directors must exercise caution before resorting to measures such as transactions at under value that diminish the assets available for repayment. Even in the face of financial adversity, adhering to legal and ethical standards is imperative.
If your company is grappling with debts, cash flow issues, or an uncertain future, you’re not alone. We engage with directors facing similar challenges daily and are equipped to provide the support and guidance you need. Reach out to us now at info@iladvisory.co.uk.