When a company gets into financial difficulties and is heading towards insolvency, the duty of the directors shifts from a primary duty to the company, to a primary duty to the creditors of that company. During this time, directors and sometimes others face a risk of being held personally liable for certain actions (or lack of action) if the company then goes into insolvent liquidation or administration. For more information on these duties more generally see: Directors duties: what are they on insolvency, and how can a director avoid personal liability for breach?
It is vital that directors are fully aware of their responsibilities and duties at times of insolvency, or on the cusp of insolvency, to avoid falling foul of these provisions. The personal financial consequences can be very severe if found guilty.
One issue that often arises in circumstances where the company is in difficulties is when a company director is accused of either giving away assets or transferring them outside of the company for less than their real value, known in insolvency legislation as a ‘transaction at an undervalue’, or TUV. Here, we explore how this might happen, and ways to avoid this.
- What is a TUV claim?
- Who can take a TUV claim?
- Who is at risk?
- What does it mean if the court finds there was a TUV?
- What is required in order to bring a successful claim?
- Who is considered to be a connected party?
- Defence to any claim
- Directors’ disqualification
- What should I do as a director to avoid liability?
What is a TUV claim?
A TUV claim can be brought when a company (which has subsequently gone into an insolvent liquidation or administration) gives a gift to another party or disposes of its property for no consideration, or the company enters into a transaction where the consideration is significantly less in value, in money or money's worth, than the true value.
Who can take a TUV claim?
Either a liquidator or an administrator will usually bring a claim, but they can also assign a claim to a third party, such as a creditor.
Who is at risk?
A claim may be taken against anyone involved in the transaction, which can include the company and/or the person or entity that benefitted from the transaction. Therefore, the directors of the company can be targeted, and this includes not only directors registered at companies house but also de facto directors (these are directors that may not be registered but act as directors), as well as shadow directors (someone with a significantly controlling interest in the decision making of the company). For more information see our article: The different types of directors in a company.
The recipient of the asset may be ordered to return the asset to the company. However, an order won’t be made against a third party who later acquired the property or assets from a person (not the company) in good faith for value to return the assets.
What does it mean if the court finds there was a TUV?
The court has a wide discretion to make any order it thinks necessary to restore the company to the position it had been in had the transaction not occurred. For example, it might order that the property be transferred back to the company, or if that is not possible then it may order one or more directors to pay a compensatory amount back into the company.
Any money ordered to be paid will go back to the company for the benefit of all creditors, not just the creditor that took the claim.
What is required in order to bring a successful claim?
As stated above, a company (which has subsequently gone into an insolvent liquidation or administration) must have given a gift to another party or disposed of its property to another party for no consideration, or for consideration that was significantly less than its true value, in money or money's worth.
What is considered to be a ‘transaction’, what is classed as ‘consideration’, and what is meant by ‘significantly less’ will depend on the circumstances, and there is no set definition of any of these terms, which are kept deliberately wide to cover many situations.
The transaction must have taken place within two years of the appointment of an administrator, or the commencement of a winding up of the company, and at the time the transaction took place the company was either unable to pay its debts or became unable to pay its debts because of the transaction.
If the transaction was entered into with a connected party, then it is presumed that the company was unable to pay its debts at the time of the transaction, so the respondent to a claim will actively need to prove the company was solvent at the time if the transaction was with a connected party.
Who is considered to be a connected party?
The definition in legislation is that a person will be connected to the company if they are a director or shadow director, or are an ‘associate’ of the company.
The term ‘associate’ has a very wide definition and includes almost any link you can imagine to a director or the company, including all familial links (including extended family links and civil partners, former spouses, illegitimate children etc) and most business links.
Defence to any claim
Note that the court won’t make an order if it is satisfied:
- that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and
- that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.
Again, this will very much depend on the circumstances of the transaction at the time, and this defence will usually lessen if the transaction was made to a connected person.
A transaction at undervalue can also be considered as wrongdoing for the purposes of directors’ disqualification proceedings. Depending on what other wrongdoing may be found, a director can be disqualified from being a company director for anywhere between 2 and 15 years. For more information see: Directors’ duties: being disqualified from acting as a company director, and obtaining leave to act despite disqualification.
What should I do as a director to avoid liability?
If your company is facing financial difficulties, and particularly if creditors are going unpaid, it is important to keep on top of the accurate financial position of the company at all times, so that you have an accurate view of the finances and can assess what transactions might be considered to be inappropriate, and subject to later criticism.
Hold regular board meetings in which decisions to dispose of assets are taken. Make sure all decisions and reasons behind them are carefully recorded in order to clearly explain the thinking behind decisions made at the time, and why they are beneficial to the company.
If possible, obtain at least one independent valuation of any assets you intend to dispose of, to avoid allegations that such a disposal was at an undervalue. Document the valuation process in the books and records carefully.
Take professional advice from an insolvency solicitor or insolvency practitioner if you have any doubts and are concerned that you are undertaking a transaction that may later be attacked.