Client advice - Disposing of company assets while approaching insolvency or liquidation

If you have clients approaching insolvency or company liquidation and who are considering disposing of company assets, they must follow strict protocol to avoid breaching the conditions set out in the Insolvency Act 1986. While clients may have honest intentions to sell company assets to raise money for creditors, they must be aware of the restrictions and ensure that they conduct the sale fairly, with the best interests of creditors in mind.

Can clients entering insolvency or liquidation sell company assets?

While clients can sell company assets before a company enters liquidation or becomes insolvent, they must be vigilant in their approach to avoid serious repercussions, such as accusations of misfeasance or fraud.

If clients facing possible insolvency wish to pursue this route, they must err on the side of caution and seek professional advice from an insolvency practitioner.

Guidance for insolvent clients considering selling company assets

The Insolvency Act 1986 sets out clear restrictions in disposing of company assets, including transactions at an undervalue and fraudulent sales. This guidance should be closely followed by company directors and agreement must be sought from other directors before offloading company assets.

Transactions at undervalue – Company assets must be sold at market value, as stipulated by section 238 of the Insolvency Act. Company directors must endeavour to maximise returns for creditors and can best avoid any criticism by approaching a surveyor or valuer to assess the valuation of any company assets they wish to sell.

This can help establish an accurate sale price and show that your clients have fulfilled their duty of care to creditors.

Preference payments – If clients act favourably towards a creditor, either by making a preference payment or transferring assets to a connected or unconnected party, this puts remaining creditors at a disadvantage. Preferential treatment when a company is approaching insolvency, if this intentionally worsens the positions of other creditors is classed as misfeasance.

What are the consequences of breaching insolvency rules?

The consequences of falling foul of insolvency legislation can lead to an investigation into director conduct to substantiate suspicions of misconduct or fraud. This could result in severe penalties or even director disqualification if the offence is grave.

If an insolvency practitioner suspects foul behaviour, they can investigate suspicious transactions going back two years and seek to reverse these if they compromise creditor interests.

Refer clients to an insolvency practitioner

If a client is considering disposing of company assets given the potential risk of insolvency, refer them to a licensed insolvency practitioner for professional guidance. This shows that your client has sought advice on the matter and intends to act in the best interests of creditors.

For guidance on whether your client can sell company assets before the company enters liquidation, seek confidential advice from your local BTG Begbies Traynor insolvency practitioner.