Yes, you can sell company assets before liquidation but it is not recommended and a Director can put themselves at added risk in doing so.
It is important that when going into liquidation and insolvent, selling assets is done with the interests of creditors in mind. Once the company is insolvent the interests of creditors can supersede those of the shareholders. This is known as the Creditor Duty.
It makes good sense to obtain independent professional advice before doing so as otherwise a Director may risk a breach of the Insolvency Act 1986 which aims to protect the interests of creditors whilst permitting companies to be wound up via the liquidation procedure.
Risks When Selling Assets Before Liquidation
There are various risks when selling assets before liquidation.
The starting point is that when selling an asset a Director must obtain the best price in line with its market value. Otherwise, it could be considered a transaction at an undervalue causing an avoidable loss to the company and therefore when going into liquidation, to its creditors.
If an asset were sold for less than its market value this may raise a significant red flag. The obvious point would be, has this happened in a desperate scramble for cash to attempt to carry on trading or is it to enable a Director to acquire the assets cheaply and obtain some improper benefit for themselves or to repay themselves in preference for example to other creditors.
Whilst selling assets in a desperate scramble for cash is understandable, when a Director is running out of cash and wants to carry on trading by selling a company asset this could actually prejudice the ability to trade (given assets are usually needed to do so as the tools of trade) and also it could restrict the returns to creditors in a liquidation. As an approach, it can also suffer from the risk of Wrongful Trading or a breach of duty or misfeasance.
Moving Assets To Another Company
Moving the assets of a company that is going into liquidation to a new company controlled by the existing Directors and shareholders should not really happen before going into liquidation; it is something that should be addressed by the liquidator.
Such an attempt could be considered as a Director trying to liquidate their company themselves by way of an informal winding up. It suffers from all the above risks and more. The perception it can give is dropping the creditors but keeping the assets and this issue led to some of the concerns over pre-pack Administrations in which rules have been tightened up as a result.
When engaged in moving assets to another company it is therefore critical that professional advice is taken, the assets are professionally valued so that they can be transferred for certainly no loss to the company being liquidated and everything is done correctly. If it is not done correctly then the transaction could be unwound by a Court on application by a liquidator.
The starting point is to convene a meeting of the Board of Directors so that a resolution can be considered and passed approving the action proposed. However, if a company has received a winding up petition then even this cannot be done without ratification from the Court in light of Section 127 of the Insolvency Act 1986.
Investigations When In Liquidation
Liquidation is an orderly winding up of a company as permitted under the Insolvency Act 1986. However, because an insolvent liquidation means that creditors usually will suffer a loss and not get all (often none) of their money back the conduct of the Directors is investigated by the Insolvency Practitioner appointed as the Liquidator. Their conduct is also subject potentially to investigation by the Insolvency Service which considers Director Disqualification Proceedings.
As a result, any transactions or sale of assets shortly prior to liquidation that seem outside of the ordinary course of business are matters likely to be investigated.
Perhaps the best route forward is not to sell assets just prior to liquidation but to leave such matters to the party responsible for winding up the company’s affairs; the liquidator. It then is the liquidator’s problem and not that of the Director.
Need advice? Speak to us as our insolvency advice you can trust and it is just a click or phone call away.
