Summary
- Directors who sell company assets to themselves before a limited company sale in the UK must comply with fiduciary duties under the Companies Act 2006, including obtaining shareholder approval and disclosing any conflicts of interest, with failure to do so potentially rendering the transaction void.
- Transactions conducted below market value can be challenged as transactions at undervalue, particularly in an insolvency scenario, where liquidators or creditors may seek to have the transaction set aside or require the director to repay the difference.
- HMRC scrutinises pre-sale asset transfers closely, and transactions perceived as artificial or primarily tax-motivated may trigger anti-avoidance measures, making independent tax advice essential before proceeding.
- This article is a plain-English guide to the legal risks of selling company assets to yourself before a limited company sale in the United Kingdom, written by LegalVision’s business lawyers.
- LegalVision specialises in advising clients on company sales, directors’ duties and corporate transactions in the UK.
Tips for Businesses
Obtain an independent valuation before transferring any asset to yourself or a related party. Disclose the transaction to the board, abstain from the relevant decision-making process and get shareholder approval in writing. Take tax advice before proceeding, not after. Prospective buyers will scrutinise pre-sale asset transfers during due diligence, so transparency early reduces the risk of a reduced purchase price or a deal falling through.
On this page
Selling company assets to yourself before a limited company sale is not straightforward, and doing it without proper legal and tax advice creates real exposure. Directors who get this wrong risk personal liability, transactions being unwound and deals falling apart during due diligence. This article will explore the key legal risks of selling company assets to yourself before a limited company sale in the UK.
This template refers to the minutes of the first meeting of the directors of a Company.
1. Understanding the Legal Framework
Before delving into the legal risks, it is essential to grasp the relevant legal framework in the UK. The Companies Act 2006 serves as the UK’s primary law governing company law.
It imposes fiduciary duties on directors, requiring them to act in the company’s and its shareholders’ best interests. These duties include:
- the duty of loyalty;
- the duty to exercise reasonable care, skill and diligence; and
- the duty to avoid conflicts of interest.
When considering selling company assets to yourself, you should be mindful of these fiduciary duties. Engaging in a transaction where you personally benefit without proper disclosure and approval may breach these duties. Consequently, a court may declare the transaction void or require directors to account for any personal gains. This exposes the director to legal action.
2. Breach of Fiduciary Duties
One significant legal risk of selling private limited company assets to yourself is the potential breach of fiduciary duties.
When directors engage in a transaction that involves selling business assets to themselves, they must demonstrate that they have acted in the company’s best interests and have obtained prior shareholder approval. Failure to do so can result in allegations of breaching fiduciary duties.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
3. Section 190 of the Companies Act 2006
Section 190 of the Companies Act 2006 requires shareholder approval before a director acquires a substantial non-cash asset from the company, or sells one to it.
A transaction is substantial if the asset is worth more than £100,000, or more than 10% of the company’s net asset value where that figure exceeds £5,000.
If you sell company assets to yourself without obtaining the required shareholder approval, the transaction is voidable. The company can unwind it, and you may be required to account for any profit you made and compensate the company for any resulting loss.
In practice, buyers and their lawyers will check for exactly this during due diligence. An unapproved transaction involving a director will raise immediate concerns about governance and can delay or derail a sale entirely.
If you are unsure whether a proposed transaction meets the threshold, take legal advice before proceeding.
4. Unfair Preference and Transactions at Undervalue
Another crucial consideration is the risk of being accused of granting unfair preferences or entering into transactions at undervalue. For example, a company selling assets to a director or related party at a price significantly below their market value could be deemed a transaction at undervalue.
In the event of insolvency, such transactions can be challenged by liquidators or creditors seeking to recover funds for the company’s creditors. The court may set aside the transaction or order the director to repay the company for the undervalued assets.
To protect against these risks, directors must ensure that any transaction involving the sale of company assets to themselves is conducted at fair market value. Obtaining an independent valuation or seeking professional advice can help establish that the transaction was fair and reasonable.
5. Shareholder Approval and Disclosure Obligations
To mitigate potential legal risks, proper shareholder approval and disclosure are vital. Under UK law, directors must disclose their interest in any proposed transaction to the board and seek approval from shareholders. Failure to comply with these disclosure and approval obligations can lead to legal consequences.
Directors should disclose any potential conflicts of interest to the board of directors and abstain from participating in board discussions or decision-making processes related to the transaction. By ensuring transparency and obtaining shareholder approval, directors can minimise the risk of legal challenges.
6. Tax Implications and Anti-Avoidance Measures
Selling company shares or assets to yourself before a company sale can have significant tax implications. HM Revenue and Customs (HMRC) consider matters relating to corporation tax, capital gains tax and all other forms of taxation and scrutinise such transactions closely to prevent tax avoidance schemes. If the transaction is considered artificial or solely driven by tax planning motives, HMRC may challenge the transaction’s validity and apply anti-avoidance measures.
Seeking professional tax advice can help navigate the complex tax landscape and ensure compliance with relevant regulations.
Key Takeaways
While selling company assets to yourself before a UK company sale may seem advantageous. However, it is essential to navigate the legal risks associated with such transactions carefully. Breaching fiduciary duties, engaging in unfair transactions at undervalue, failing to obtain proper shareholder approval, or falling afoul of tax regulations can have severe legal consequences.
To mitigate these risks, you should seek professional legal and tax advice before selling company assets to yourself. By staying informed about the legal framework, seeking expert guidance, and conducting transactions transparently and fairly, you can minimise legal risks and ensure a smooth and legally compliant company sale in the UK.
If you need legal assistance selling or purchasing company assets, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced business sale and purchase lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Why is it a good idea to obtain legal advice from an expert lawyer?
It is a good idea to obtain legal advice before any share sale or asset sale to ensure legal compliance and avoid actions which may cause prospective buyers of the company to pull out of a potential purchase. An expert lawyer can advise on these factors and any sale or purchase of intellectual property or company equipment.
Why do potential buyers sometimes treat the sale of company assets with scepticism?
A prospective new owner may fear that the current business owner has unloaded the best company assets to themselves before the sale. Naturally, this may render the purchase of the company a worse deal or, if uncovered during due diligence, result in a reduced purchase price.
What are a director’s fiduciary duties when selling assets to themselves?
Directors must act in the company’s best interests, avoid conflicts of interest and obtain prior shareholder approval before selling company assets to themselves. Failing to do so can result in the transaction being declared void and expose the director to personal liability.
What is a transaction at undervalue?
A transaction at undervalue occurs when company assets are sold at a price significantly below market value. In insolvency, liquidators or creditors can challenge such transactions. A court may set the transaction aside or order the director to repay the difference to the company.
We appreciate your feedback! Request your free consultation now.
