Why Directors Facing Insolvency Must Beware Transactions at Undervalue

When a director of a company is facing insolvency, the thought may well occur to them to that it may be a good idea to sell or transfer company assets as quickly as possible in order to protect them.

However, it’s actually a requirement for company directors to maximise creditor returns during insolvency, and therefore by selling or transferring assets at an undervalue they could be considered to be carrying out wrongful or fraudulent trading. Company directors therefore need to be very careful of transactions at undervalue if they are facing insolvency.

What are Transactions at Undervalue?

A transaction at undervalue is a transaction which doesn’t reflect the asset’s true market value. This can be either a sale of an asset or a transfer of assets. This can be a problem as company directors are required to maximise their creditors’ returns during insolvency, and as such these transactions can be seen as fraudulent or wrongful.

During insolvency, it is the job of insolvency practitioners to closely inspect all company transactions, and they will highlight any that they feel are questionable or suspicious. Administrator and liquidators then have the power to apply for a court order which can reverse any transaction at undervalue and restore the situation to the state it was at before the transfer or sale took place.

It’s not just the most recent transactions that will be inspected, either; insolvency practitioners may look into a company’s transactions for up to two years before the point where they went into administration. If they find any transaction which has a significantly reduced value, or gifts which have been made without an associated payment, they are duty bound to make a report to the Secretary of State.

How are Undervalue Transactions Penalised?

Transactions at undervalue are a breach of the Insolvency Act 1986, meaning that company directors that undertake this practice could face both financial penalties as well as the prospect of criminal prosecution. Indeed, company directors can be held personally liable for some or all of the company’s debts, and may also be disqualified for up to 15 years if it is believed that they have traded wrongfully during insolvency.

Following Formal Insolvency Procedures

It’s therefore extremely important that company directors think very carefully before they decide to trade at undervalue in order to try to protect company assets. Creditor interests must always come first, and if you want to avoid any accusations of transactions at undervalue, it’s important that company directors follow a formal procedure for selling or transferring assets.

This process usually requires a board meeting in the first instance where all action is carefully documented. A RICS qualified surveyor or valuer should be appointed to make sure that going concern and forced sales values are provided. Once assets have changed hands, it’s also important to ensure that funds are banked swiftly and full records retained for several years following the statutory requirement.

If you are at all unsure on how these records need to be maintained, consult the advice of local bookkeepers. They will be able to ensure that your documentation and paperwork is present and correct.

Fake Bailiff Warning for Businesses

Local businesses have been warned of a fake bailiff scam. Police have been warning businesses that conmen are contacting companies requesting payment for non-existent debt.

The conmen are targeting small to medium sized businesses primarily, often after finding their contact details in online business directories. They then phone them and try to extract cash from them by claiming that they are behind with certain fees.

Businesses Targeted

A range of businesses have so far been targeted, including nurseries, manufacturers, taxi services and hotels, however all business types are at risk from the scam.

Police have found that the fake bailiffs seem to be targeting those businesses with slightly more mature and elderly directors, who are traditionally seen as the victims of such scams.

Cold Calls

Businesses are finding themselves at the mercy of cold calls from these fake bailiffs. They are purporting to be bailiffs working on behalf of the court, attempting to recover debts which don’t exist.

The targeted companies are then requested to make payment by means of a bank transfer, and, if the contact that the conmen are dealing with refuses, the fake bailiffs threaten to visit the premises in order to recover the debt that they claim is owed to them.

Dealing with the Conmen

The advice from the police, Trading Standards and the accounts managers at the business directories for dealing with the conmen is to ask for details of the debt collection agency, and if you are at all suspicious, hang up the phone. Do not under any circumstances agree to transfer money or give your bank details.

Once you have hung up the phone, report them to Trading Standards who can investigate.

Are you Wasting Too Much Time on Admin?

Do you find yourself constantly tied up in the red tape of admin? Struggling with day to day financial tasks such as tax calculations and payroll, when all you really want to do is work on the products and services you offer? If so, you’re not alone.

According to Tide, 63 percent of young businesses are spending too much time on admin. At least one day a month, to be precise. And these tasks typically include the likes of administrative financial tasks, tax calculations, invoicing and paying invoices, expenses and setting up bank accounts.

So are you wasting too much time on admin?

Bank Account Woes

Some of the biggest problems that the 149 small business owners surveyed had were with their bank accounts. To this end, more than a third rated the help and support that they received from their bank accounts as poor or very poor, and two thirds said that they wouldn’t be likely to recommend their bank to other business owners.

36 percent of respondents also commented that they were dissatisfied with the ease of use of their business bank account.

Financial Admin Difficulties

And the financial administration problems don’t stop there. According to the survey, other admin difficulties can be found in the likes of tax calculations, accounting, recording and paying expenses, invoicing, payroll and having to manage multiple different financial applications.

When asked, the top five things that most new business owners had on their wishlist to make their lives easier included:

• Easy internet banking (listed by 80 percent of respondents)
• A good mobile app (66 percent)
• Free transactions (54 percent)
• A speedy set up (39 percent)
• A good length to the free banking period (36 percent)  

Factors the respondents didn’t rate highly included some of the more traditional aspects of banking, such as banks offering an overdraft, telephone support or the proximity of a local branch.

The Wisdom of Age

The report also found that the age of the business had a factor in determining which admin tasks companies struggled with the most. For those businesses less than a year old, tax was one of the aspects that they found hardest to deal with, whereas more established companies found that the responsibilities of payroll were more of a burden.

No matter what difficulties you may be experiencing as a company, or how established your firm is, the expertise of local bookkeepers could be all you need to keep your administration in order. Speak to your local bookkeepers today to establish how they can stop you from drowning in admin.