Trying times generate testing challenges. This is especially so when decisions made are likely to be scrutinised with the benefit of hindsight by shareholders in a Company or its creditors.
Typical issues arising might relate to the realisation or transfer of an asset of a Company, a re-structuring of the Company in light of its commitments or payments of dividends when times were good.
Duties of directors are touched on in previous articles but must remain at the forefront of the minds of the Board. Inevitably in the event of insolvency, the actions of the Board come under close examination.
When realising or transferring an asset of a Company, it is important to bear in mind the different provisions which might be relevant for the protection of shareholders and creditors. For example, if it is intended to sell a property to a director of the Company, then it is likely that the Company’s shareholders must approve it first (in terms of the Companies Act) failing which the transaction might be voidable and the director who benefited, as well as those who authorised the transaction, will be liable to repay to the Company any gain from the transaction as well as indemnify it against any loss which the Company incurred as a result.
In terms of the Insolvency Act, if the transaction is completed and the price is less than ought to have been paid then a liquidator, administrator or a creditor of a Company may challenge the transaction in court to the effect of obtaining a court order to unwind the transaction.
It is possible that the transaction is completed for full value but the consideration is intended to be settlement of a debt or other obligation owed by the Company. Again, the provisions of the Insolvency Act are relevant here as the result of the transaction may be to create an unfair preference for one creditor over the general body of creditors. Accordingly, in terms of the Insolvency Act, it may be challengeable and possibly reduced by the Courts, again on the application of a liquidator, administrator or creditor of the Company.
The same considerations are likely to be relevant in a re-structuring of a Company or its business.
Inevitably, declarations of dividends in the good times might be scrutinised as circumstances change. The Companies Act is the reference here with specific provisions applying. The fundamental rule is that a company may only make a distribution out of profits available for the purpose. If a shareholder knows, or has reasonable grounds to believe, that a dividend or other distribution has been made in breach of the relevant provisions of the Companies Act, then that shareholder is liable to repay it.
Contact bto for further advice in relation to these issues.
Contact:
Jeremy Glen
Partner, Glasgow