Lessons to be learned

While there are laws that prevent the transfer or disposal of assets to avoid liability to creditors, solvent businesses should consider whether to rearrange how their key assets are owned.

It will often be preferable for key assets (for example land, capital plant and intellectual property) to be owned by related entities and leased or licensed to the trading entity, rather than being owned by the trading entity itself. This is particularly useful where the trading entity is operating in an environment that is risky or where litigation is common and expensive. It can also be useful when liability insurance is not obtainable or financially viable. While a creditor of the trading entity would still have access to that company’s assets to meet any claim, those assets would not then include key assets owned by related entities and leased or licensed to the trading entity. This can also give more options for the re-establishment of a new business in the event of a failure of the trading entity arising from an economic downturn or creditor claim.

This can be more easily achieved by new companies starting up. Existing solvent companies with secured creditors will need those creditors to consent to any such proposal involving a transfer of such assets by the operating company to that company’s related entities ,and to release their security over those assets .If that transfer is a major transaction then any decision by the Board of the company to implement such a transfer will require a special resolution of shareholders to authorise or approve  that board decision .

It is as important as ever to protect key assets and to consider how those assets should best be owned given the business environment your business operates in. We are always available to assist with that process.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.