THE SUNDAY TIMES - BUSINESS DOCTOR
2 May 2010

H A writes: I am a shareholder in a company that is struggling to pay its debts. We are likely to have enough income to rectify this in about a year but, in the short term, we are considering transferring our potentially valuable patents into a new company to safeguard them from the risk of company failure. What do you advise?

Dear H A,

Your main problem is a cash flow requirement which needs to be addressed immediately writes Jennifer Lane, Assistant Manager, Corporate Finance & Rescue, with Horwath Bastow Charleton in Limerick. Although you expect to have enough income in one year in order to meet the company’s debts, this is a considerable timeframe for a company to continue to trade whilst in financial difficulty. During this time, the directors must ensure that the overall creditor exposure is not increased and that creditors are paid in order of priority and on a pari passu (i.e. proportionate) basis.

When attempting to protect valuable company assets it is vital to consider the implications of such actions. Should the company ever become insolvent and a Liquidator be appointed, investigations will be carried out into the financial affairs of the company, including the sale of all non current assets for a period of two years preceding the date of liquidation. If the Liquidator finds that market value was not obtained during the sale then s/he will be required to ascertain whether this could be constituted “reckless trading” or “fraudulent preference”, both of which have serious consequences. These consequences include possible restriction or disqualification from acting as a director, as well as personal recourse to the directors for losses incurred as a result of the director’s actions.

It would appear that you have two options available to you:

I would strongly recommend that you consult your financial advisor or a specialist insolvency practitioner to obtain full advice, as there may be further information which has not been provided which may be relevant in this matter.