Government report on MG Rover
A report was produced which included discussion of the law governing transfers at an undervalue, highlighting the potential issues arising from transfers at an undervalue, and for example transfers of tax losses within groups; members should be cautious given the criticism these transfers receive in the report.
The investigators note that transfers within groups of companies at net book value are likely to be unobjectionable provided:
They are not entered into for the purpose of putting assets beyond the reach of creditors, the companies making the transfers are financially secure the transfers have been unanimously approved by shareholders, and they do not involve an unlawful distribution. In the case, however, of a company which is insolvent, or one whose prospects of survival are uncertain, such a transaction may be considered to be to the prejudice of creditors and in breach of the directors' duties.
The report emphasises the law governing transfers by a company of assets at an undervalue, including the need to obtain shareholder authorisation, and the fiduciary duty of directors to consider the position of creditors where the solvency of the transferring company is uncertain. The report includes an analysis of the relevant case law (see Chapter VII, Project Platinum, pages 215 et seq), stressing that creditor interests come into play when a company is in financial difficulties (whether technically insolvent or not), but the investigators acknowledge these are complex legal issues and refrain from expressing conclusions, instead leaving this to the courts (if a case is brought). However, the investigators express support for the view that it should not be possible for shareholders to approve transactions to the financial prejudice of their company if the company's survival, at least in the longer term, is known to depend on the achievement of a particular event and there is substantial doubt as to whether the event will happen.
The investigators note that disposals at an undervalue can amount to distributions, if they are made by the company for the benefit, direct or indirect, of its shareholders, observing that if the company does not have positive distributable reserves such distributions can offend against the statutory rules and the common law prohibition on returning capital to shareholders. They note that directors who authorise unlawful distributions are in breach of their fiduciary duties and, if they cannot show that they acted honestly and reasonably and ought to be excused, could be liable to compensate the company or account for any profits they have made. For more guidance on distributable profits,
see TECH 1/09 Guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006 and the exposure draft TECH 3/09 Guidance on realised and distributable profits under the Companies Act 2006 - Additional draft guidance.
The report, along with the associated report from the Financial Reporting Review Panel ('FRRP'), also suggests that mandatory disclosure of the true or potential value of assets that are transferred at an undervalue would improve transparency and help readers of financial statements to gain a better understanding of a company's financial performance, and this is being considered by the Accounting Standards Board ('ASB').