Risk Of Transferring Goodwill Out Of A Company

Overview Of The Risk Of Transferring Goodwill Out Of A Limited Company

After almost 600 paragraphs of a fascinating judgment from Insolvency and Companies Court Judge Barber (“the Judge”) in the case of CSB 123 Ltd, Re [2021] EWHC 2506 (Ch) (“Reynolds v Stanbury”), we learned that the Liquidator lost but even the incurious mind could not avoid noticing that there is a risk of transferring goodwill out of a Limited Company.

In this case, it was held that no goodwill had been transferred out of the relevant company but there is no substitute for reading the whole judgment as this post simply focuses on a few key issues.

The Respondent was a well-known fashion stylist. The Applicant was a Liquidator who sought recovery of £1.4 million from the Respondent for misfeasance and breach of duty.

The application was based on the asserted transfer of a business from a company (CSB 123 Limited (“the Company”) in Compulsory Liquidation to other connected companies controlled by the Respondent. It was brought under Section 212 of the Insolvency Act 1986.

The Judge notably said that the Respondent in relying on legal and accounting advice was not, in this case, an abdication of her Director duties.

The risk of transferring goodwill out of a Limited is that you might be sued by a Liquidator who examines later on what has happened and considers that such a transfer is not for sufficient value and or has been made without sufficient regard for Director duties. The following statement by the Judge does not eliminate that risk:

It is most regrettable that she and her family have been put through the stress of these proceedings.

When Transferring Goodwill Who Has The Burden Of Proof?

A Director has a fiduciary duty to account for their dealings with the company’s property. Once a Liquidator proves that a company has an asset that has been transferred the burden is on the Director to justify the transaction.

For example, in cases of an Overdawn Directors Loan Account and in particular, when a Director seeks to clear the overdrawn loan account by introducing transactions and the Director seeks credits (such as for dividends or salary); the burden is on the Director to justify the credits claimed.

The Judge however in this case said that whilst the burden of proof is with the Director to account for his dealings as a fiduciary, nevertheless, the burden was with the Liquidator to prove his pleaded case. The Judge rejected the applicant’s position on the burden of proof and said that before the burden shifts to the Director, the Applicant first has to prove that the relevant property was transferred to the benefit of the Respondent.

Whose Goodwill Is It?

A key point of the Respondent was that as all the goodwill was her own personal property ie. not that of the Company, there had been no transfer of the business of the Company for no consideration. In any event, she said that she could do as she wished with her own goodwill.

The Judge assessed the ownership of the Goodwill and decided that it was owned by the Respondent personally. The Judge assessed in a nutshell that without the Respondent the Company had no business:

SC1 had no market presence at all. Personal styling clients came to the Respondent and not SC1. The Respondent generated value through her own services. She even used her own American Express credit card to effect purchases as and when necessary.

FSPG Valuation

The applicant said that the value of the business transferred was £1.4million based on a valuation from accountants FSPG dated 22 October 2012. However, the Judge said that notwithstanding it was a valuation near to the time of asserted transfer little weight could be placed on it as a single page document with no supporting narrative or details of the business and assets.

Insolvency: Risk Of Transferring Goodwill Out Of A Company

The Judge said that the applicant did not evidence insolvency notwithstanding that it was a part of the applicant’s pleaded case.

The Judge said the filed annual accounts showed the Company was not insolvent.

In assessing solvency the Judge was wholly unpersuaded that costs of Liquidation ought to feature in that assessment:

In my judgment, it is unreal to suggest that in determining the solvency or insolvency of SC1 at any material time, allowance should be made for the time costs and conditional fee liabilities run up by the Applicant in pursuing this litigation. To adopt a phrase employed by Lewison LJ in Evans v Jones at [22], such costs and liabilities were an ‘unknown unknown’.

Transfer Of The Handbag And Jewellery Business

The Judge was somewhat critical of the applicant’s pleading of the transfer of the handbag and jewellery business from the Company to a connected company referred to as GL, in terms of the specifics of the assets in question and timing of their transfer.

However, the Judge found the Company was solvent and there was no unlawful transfer:

At all material times, SC1 was solvent and the shareholders of SC1 (comprising the Respondent and her father prior to the restructuring, GL after the restructuring) both knew of and consented to future handbag and jewellery sales opportunities being put through GL rather than SC1. This was an entirely legitimate commercial arrangement between a parent and its 100% owned subsidiary, formally recorded in the Disclosure Letter.

Honest And Reasonable Defence: Risk Of Transferring Goodwill Out Of A Company

The Respondent Director was said to have relied upon solicitors and accountants for all legal and financial who did not inform her that she was acting contrary to her Director Duties:

… it is clear from the evidence that at all material times, the Respondent did seek legal and accounting advice from Taylor Wessing and FSPG in relation to the affairs of SC1, even if Taylor Wessing were not formally instructed to act on behalf of SC1. I reject the submission that the Respondent’s reliance on professional advice from Taylor Wessing and FSPG constituted an abdication of her duties as a director. Quite the contrary: it was entirely responsible and reasonable for the Respondent to seek out and rely upon such advice.

The Judge did not find that the Company had given away its trading business.

Disclaimer: Risk Of Transferring Goodwill Out Of A Company

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