A recurring point of concern in contentious insolvency cases involves an insolvent company having transferred its business or its assets to a new entity without consideration being paid. Directors and shareholders do not always appreciate why this may be problematic, particularly where they do not perceive any value in the assets being transferred. However, elements of an organisation such as an established customer base, an experienced workforce and well-developed operating processes take time to build. These advantages would not exist for a business starting from scratch, yet they are fundamental to many operations and therefore carry real value for any successor entity.
From a creditor’s perspective, such transfers can cause understandable concern. Creditors may feel aggrieved when they see directors or shareholders benefiting from the assets of an insolvent company while their outstanding debts remain unpaid. It is often not clear to external parties what steps have been taken to facilitate the transfer of the business or what consideration, if any, has been paid.
Business owners and directors can take steps to reduce their exposure by obtaining an independent valuation from a suitably qualified professional. Where an entity is unable to meet its debts, early engagement with an insolvency practitioner is crucial. In some circumstances, confidential marketing of the business prior to sale may be appropriate to identify any independent prospective purchasers. Taking professional advice to ensure that proper consideration is paid can help protect directors and owners from later challenge.
Determining the value of private companies which do not have an open market for shares is not straightforward. Nonetheless, valuation experts have a range of recognised methodologies at their disposal, enabling them to arrive at an estimated value or range.
Insolvency practitioners appointed to a formal process will typically review transactions carried out in the period leading up to insolvency. This may include commissioning their own valuation and pursuing claims against directors or new owners where a transfer at an undervalue is identified.
Statutory powers are available to administrators, liquidators and trustees in bankruptcy to apply to the court where assets, including intangible assets, have been transferred for no value or significantly less than their worth. Remedies can include reversing the transaction or requiring the recipient to pay the full value. In some cases, disputes can be resolved through settlement before court proceedings commence, avoiding protracted litigation.
In conclusion, the intangible assets embedded within a business are often underestimated when assessing overall value. Specialist advice is needed to identify and quantify their worth. Where one entity ceases trading and another effectively continues the same business, it is likely that a transfer of all or part of the business has occurred. Early identification and reporting of such issues can help ensure a fair outcome for all stakeholders involved.
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