Selling assets prior to a Liquidation – not illegal but be careful!

A tricky area of the insolvency world is the sale of company assets, or the sale of the whole business, where a company is insolvent, or potentially insolvent.  It is such a tricky area that we recommend that if a director is contemplating the sale of assets that they seek external expert advice before undertaking the transaction. That advice could come from your accountant, lawyer or us – however, if we advise you on the transfer of assets then we will not be able to accept an appointment as liquidator.  There are four principles we recommend you follow.

First principle – There is nothing illegal about the sale of assets when a company is insolvent.

Having said that, there are a number of areas of the law that need to be considered and complied with. Whenever assets are to be sold to a related party the directors need to be particularly careful.

Second principle – Any sale of assets needs to be at a “market value”.

Where assets are to be sold to a related party, we always recommend that prior to the transaction, the directors obtain an external independent valuation of the assets to be transferred or sold.

Third Principle – ensure sale proceeds are deposited to the company’s Bank Account.

There is a tendency for Directors to sell assets and then think it appropriate to send the proceeds where they think best.  That will often be against the Director loan account or to particular creditors (for example those with personal guarantees of the director).  It is best that the sale proceeds be paid to the company Bank Account and then we recommend that a Liquidator be appointed before those funds are dispersed.  Then the Liquidator can disperse the funds by way of dividend in the appropriate order as set down by the law.

Fourth principle – Whilst the sale of assets is being considered or completed, don’t let the company incur new liabilities.

If new liabilities are incurred during this process and they remain unpaid after the sale of assets then the directors may well be facing an Insolvent Trading action from a liquidator.

If you adhere to the above principles then all should be OK.  Perhaps even better, because a Director pre-liquidation has sold the assets, they will often have obtained a price better that that which a liquidator could have obtained post-liquidation.  So creditors are often better off.  They won’t be happy… but they will be better off.