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Can an asset be “sold” to a director without any cash being paid?

Replies : 4

Question asked by:

Bill Haskins - view profile

Hi,  

A member has sent us this query.  Can anyone help, please? 

It concerns a UK registered SME with two employees (both of whom are directors/shareholders of the company), which reports under UK GAAP.

" The company is going to be dissolved as the directors have decided to go their separate ways. The company owns a partially developed commercial property worth £100,000 which one director wishes to buy from the company. As the director in question is due a capital distribution of around £150,000 when the company is liquidated is it acceptable for the property to be "sold" to him without any cash being paid to the company (i.e. he is set up as a debtor) then when the company is liquidated this debt is offset against part of the distribution he is due? We're trying to avoid the director having to liquidate his personal assets (ISAs, etc) to buy the property only to have most of the cash returned to him as a capital distribution which he can't then put back into ISAs. "

Thanks,

Bill Haskins, CIMA

directors cum shareholders in SME have right to all decisions.

Since directors are also owners acting as shareholders with no other venture capitalist or bank borrowings, then you may do so by contra/SWAP. But make sure revaluation of property been undertaken to make a fair price for the property for Property gain tax to be liable by the company. Every disposable must be at arm's length prices, otherwise a public auction is required.

.Can an asset be “sold” to a director without any cash being....

I second Mr Loong. I don't see any harm in this contra transaction provided its done at arm's lenght.

Can an asset be “sold” to a director without any cash being paid

A senior colleague kindly provided the following comments:

“The question is can capital be returned to shareholders in assets other than cash?  Yes, given a few conditions to ensure that everyone’s interests are protected.

First, the other stakeholders.  It’s stating the obvious to say that all outstanding debts including tax liabilities need to be settled first before the company is wound up but it is such a serious issue to make illegal distributions of capital, for which directors can be held personally liable, that it bears mentioning.

Secondly, the other shareholder(s) – are there only the two?  Transferring the asset at book value to one shareholder will disadvantage other shareholder(s), if the book value of the property is less than its fair value.  So as the previous commentators state, the transfer must be at arm’s length prices.

The directors should obtain legal advice (to ensure they are not falling foul of company law requirements about the reduction of capital) and a valuation of the property from an appropriately qualified valuer.”

Can an asset be “sold” to a director without any cash being paid

Dear Goh and Shargeel,

Thanks very much for your answers.

Much appreciated,

Bill