Asset Sales – What are the Rules in Insolvency?

A company director is free to offload company assets at any point in time, however, they must comply with the ground rules – asset sales must be in the best interests of the business and should not harm the pockets of company creditors.

If the company is at the edge of insolvency or already insolvent, one golden rule applies: to steer clear of selling company assets. This is to avoid accusations of misconduct or fraud and to ensure that any decisions made during this critical stage support business recovery. A licensed insolvency practitioner will typically step in at this stage to guide the director and arrange the sale of company assets in a controlled manner.

Chelsea Williams, a company rescue specialist at Scotland Liquidators, dives into the rules regarding selling company assets when tackling the prospect of company insolvency.  

Can a company sell assets through auction before becoming insolvent?

If a company is insolvent, the company director must cease asset sales, while a company yet to become insolvent can sell company assets, although this must be conducted legitimately and with extreme care.

There are steps business owners can take to erase suspicions regarding the wrongful sale of assets which include:

• Open discussion with board members - Seek their views on the proposed asset sale to request approval and eliminate any potential conflicts of interest. Record evidence of this through minutes to show that the decision was well considered.

• Sell assets at market value – To avoid accusations of giving preferential treatment or selling assets at undervalue, seek a professional asset valuation to establish the market value of assets and set a price accordingly.

• Seek insolvency guidance – If you are unsure whether your company is insolvent or solvent, seek advice from a licensed insolvency practitioner to prevent falling foul of your directorial duties.
  

What deems a business insolvent?

A business is insolvent if it runs out of cash, owes more than it is due, and cannot afford to settle invoices when they are issued. The future of an insolvent business is often highly uncertain, which is why selling assets without professional intervention is best avoided.

A helping hand from a licensed insolvency practitioner can help businesses at the end of the road settle affairs with creditors and bring their business to a close. The insolvency practitioner may sell company assets to raise funds for creditors as part of a formal insolvency process.

If the company can be rescued with a cash boost, they may offload assets to raise essential funds. Selling assets at auction can be beneficial under both scenarios.

Raising funds for creditors through an asset auction

As part of the company liquidation process, the insolvency practitioner will set out to raise urgent funds to clear company debts which may involve selling company assets through a liquidation auction. A liquidation auction is an accessible way for businesses in liquidation to raise funds for creditors.

If the company rescue route is pursued, the same steps may be taken to provide the business with a cash boost to restore it to its former health. Most businesses will have assets that can be converted into cash, which is where an asset auction can provide a tailored solution.

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