Sale of assets at undervalue
Personal liability for the shortfall
There is nothing to stop a director of a struggling company selling company assets. We have a page called Selling Assets of an Insolvent Company which gives some guiding principles. But here we want to look at the potential for director personal liability.
The prime concern of a director should be that any assets that are sold, are sold at a fair value.
If any assets are sold at undervalue, a director runs the risk of the company’s liquidator declaring it an uncommercial transaction and voiding it. An uncommercial transaction is defined as a transaction that it may be expected that a reasonable person in the company’s circumstances would not have entered into having regard to:
- the benefit or detriment to the company;
- the respective benefits to other parties; and,
- any other relevant matter.
To be voidable, an uncommercial transaction must have occurred during the two years before the liquidation. However, if a related entity is a party to the transaction, the time period is four years and if the intention of the transaction is to “defeat creditors”, the time period is ten years. The company must have either been insolvent at the time of the transaction, or became insolvent as a result of the transaction.
By voiding the transaction the liquidator can recover the asset and resell it for a fair value, or hold the directors personally liable for the difference between the actual sale value and what the liquidator deems to be a fair value.
If the above advice has not answered your questions you might want to review the following pages and downloadable Information Sheets:
- Selling Assets of an Insolvent Company
- Paying Creditors Pre-Liquidation
- Directors duties when facing Insolvency
Or please call us for free advice.