Updated: 27th March 2020
The time period between a creditor’s winding-up petition and the subsequent court hearing, has been termed a ‘twilight zone’ for insolvent companies. Severe restrictions are placed on their ability to trade during this time, particularly in relation to the transfer or sale of company assets.
Whether or not a creditor is successful in obtaining a winding-up order, the company in question will want to continue trading as far as possible until a decision is made. The problem is that the court considers the position of creditors as a whole in these instances, rather than the company, its directors or shareholders.
One of the issues addressed by the court is the potential for directors to sell company assets below their true market value simply to move them from the reach of a liquidator. It is also possible that assets may form part of a preferential payment.
Either way, harming creditor interests in this way by reducing the amount available for repayment is a breach of director duty.
Begbies Traynor is the UK’s market leader in business rescue and recovery. We can offer expert advice on how to proceed once a winding-up petition has been presented by a creditor.
Provision is made within the Insolvency Act 1986, to protect creditor interests following the presentation of a winding-up petition. Legislation prevents directors from transferring assets once a petition has been presented, and if they do so, they are in serious breach of their duties.
In these cases, the courts can demand the return of the asset, or repayment if necessary, along with any associated legal expenses in reinstating the asset in question. Although under these conditions it may seem that ‘normal’ trade is impossible, there is an avenue for directors to move assets legally under a court order if the transaction will not harm creditor interests or adversely affect the company’s financial position any further.
A validation order may be sought by the insolvent company, and provides sanction from the court to transfer or otherwise deal with the specific assets named. The order is notified to the petitioning creditor, along with any other creditors attending the court hearing for winding-up.
The validation order allows for the transfer of a company asset, but it must be at the full market value, as any amount less than this will diminish the total available to repay creditors.
Proof will be required that selling or transferring the asset will not compromise the company’s solvency any further, or that it would increase creditor returns. The court has full discretion over whether an asset can be validated under these circumstances. Where the money is intended to repay lending that carries a director’s personal guarantee, it is unlikely to be sanctioned.
Begbies Traynor can offer professional guidance on pre-insolvency transfers of assets. We will ensure that you remain within the rules of insolvency, and as a director, do not place yourself at undue risk of personal liability. Call one of the team for a same-day consultation.