Distributions: At what price?

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With businesses and companies trying to return to normal economic life and activity, I consider in this piece some matters that companies may be overlooking when making distributions and in their intra-group transactions.

It is well known that section 829 of the Companies Act 2006 (“CA 2006“) defines a distribution as “every description of distribution of a company’s assets to its members, whether in cash or otherwise”. This clearly captures dividend payments to shareholders but also means, as was established long ago in Aveling Barford v Perion Ltd, that a transfer to a sister company within a group can be a distribution if it is at an undervalue.

If I consider the position relating to cash dividends, it is clear (sections 836 to 839 CA 2006) that directors must have regard to “relevant accounts” which would be the last annual accounts, other than where those accounts do not show distributable profits. If the last annual accounts do not show sufficient reserves then interim accounts must be prepared to identify whether sufficient reserves exist to make the payment. My concern at this time is whether directors are giving proper regard as to whether there should be an impairment since the last accounts date or (if preparing) included in the interim accounts; it might be considered that it is a brave director who thinks their group or the assets they hold have the same value post-lockdown.

Similarly, as many companies look to re-organise their existing groups for perfectly valid reasons (prepare for divestment of non-core assets for example), in transferring shares in subsidiaries or assets intra-group for that purpose, the principles of section 845 CA 2006 and Aveling Barford are more pertinent than ever. Trying to put it simply, if subsidiaries or assets are being transferred at book value then scrutiny as to whether that book value is the market value of the asset is critical. If the book value is not the market value (and this is where my concern comes in as to whether directors have their mind to this, particular as it is often thought of being “only intra-group”) then the company making the transfer will need positive reserves as the transfer will be considered a distribution. If the market value is less than the book value then consideration of the reserves position is even more critical.

This is particularly important for directors as if they make a distribution in breach of the provisions of the CA 2006 they may be personally liable to repay the company for loss if they know or ought to have known that it was not a lawful distribution. I would think it might be hard for directors to argue they didn’t know it was not lawful if they have not considered impairments or the values at which they are transferring assets. Additionally, if profits weren’t available to match the distribution, the distribution itself could be unlawful and any shareholder who knows or has reasonable grounds to believe a distribution is in breach of the provisions of the CA 2006 is liable to repay the distribution (or if a non-cash dividend in specie then to pay the amount equal to the value of the distribution). This is a real double whammy as not only could directors end up personally liable but the transaction could also be unwound.

So, I raise this as a reminder to directors that although their focus may well be on the business and the underlying dynamics and metrics of trading through these difficult times, they should not think that the CA 2006 does not apply and won’t be looked at in future diligence or by other interested third parties, including HMRC.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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Stuart Hatcher

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A quick guide to the rent collection minefield

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With substantial sums still outstanding for the March Quarter, landlords face an even tougher battle collecting rents for the coming June Quarter. This Guide looks at the options likely to be available in light of Government action to date and future likely restrictions. If you need help or support with these issues or other contentious property matters, our experts are on hand to help.

Click here to download the briefing in PDF format


Our Guide looks at the options likely to be available in light of Government action to date and future likely restrictions:

Forfeiture

  • Present position: Not permitted before 30 June 2020 (23 August 2020 for residential properties).
  • Likely future position: Extended for retail/hospitality premises and possibly all premises.

CRAR (i.e. Distress)

  • Present position: 90 days arrears i.e. cannot use for March quarter until 24 June 2020.
  • Likely future position: Extended for retail/hospitality premises and possibly all premises.

Winding up petition

  • Present position: Not permitted under proposed Corporate Insolvency & Governance Bill pursuant to a statutory demand served from 1 March 2020 i.e. for March quarter – Bill will prevent Petitions before end of July in all probability. Also limitations on generally using Winding Up to recover debts from coronavirus affected tenants.
  • Likely future position: Extended for retail/hospitality and, possibly, all premises – only debt proceedings will be permitted to recover arrears.

Debt proceedings

  • Present position: Permitted but it takes at least 14/28 days to apply for Judgment, and possibly considerably longer, and then further time is needed to enforce a Judgment. Landlords can claim interest and costs as well. Useful step though to seek to make tenant focus on position regarding your premises above others and for pursuing guarantors.
  • Likely future position: To continue to be permitted as tenants can always ask the Court for further time to pay if this is needed and appropriateand Courts will consider position in light of the Code (see below).

Government code for High Street/Retail/Hospitality premises

  • Present position: To be finalised by June quarter and to place emphasis on landlords and tenants agreeing payment plans and concessions where warranted.
  • Likely future position: Will come into effect but be voluntary (at least to begin with whilst it is seen whether it works). It may require tenants claiming they can’t pay to disclose relevant financial information and will encourage mediation to resolve any dispute.

Statutory moratoriums

  • Likely position: To be introduced by proposed Bill and will allow tenants some breathing space from any enforcement action (initially 20 working days but can be extended) to save themselves as a going concern with the help of a Licensed Insolvency Practitioner).
  • Likely future position: Will be used by tenants who cannot reach agreement for credit with landlords and/or suppliers. Unfortunately, many companies will not survive as going concerns and will enter Administration or CVAs.

Government loans scheme

  • Present position: The Bounce Back Loan Scheme, Coronavirus Business Interruption Loan Scheme, Coronavirus Large Business Interruption Loan Scheme, and the Covid Corporate Finance Facility provide tenants, and some landlords, with substantial financing to pay rents and other liabilities.
  • Likely future position: Landlords will press tenants to use the loans they have obtained to pay rents or to explain why they have not sought such financing if they cannot pay their rent.

Business interruption insurance

  • Present position: Many tenants have business interruption insurance cover but the Financial Conduct Authority is bringing test cases to be heard in July 2020 to establish whether such cover applies to Covid-19 (particularly where premises are unaffected thereby).
  • Likely future position: There should be substantial clarity by end of July/early August (assuming there is a speedy Judgment) and tenants may have substantial insurance cover to assist paying landlords and suppliers.

Sub-tenants

  • Present position: Where the tenant has not paid the rent, landlords should serve a Section 81 Notice on the sub-tenant so that the sub-tenant pays its rent direct to the landlord.
  • Likely future position: No change.

Download our Quick Guide to the rent collection minefield

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Ben Barrison

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HMRC nudge letters

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The implementation of the Common Reporting Standard (CRS) and other data exchange regimes means that HMRC have received, and will continue to receive, substantial information about the global tax affairs of persons with connections to the UK. This includes information about assets and income and gains generated outside the UK. This enables HMRC to target those who may have failed to declare all their UK tax liabilities accurately.

One way in which HMRC has been following up on information obtained is by issuing “nudge letters” by post. These typically request that the recipient either declares their UK tax affairs are in order or they will take urgent steps to bring their affairs up to date. The letters typically request a written response within 30 days.

HMRC are still issuing nudge letters requesting a response within 30 days, notwithstanding the recipient’s circumstances may be disrupted by the COVID-19 crisis. Regardless of the current circumstances, it is important that those in receipt of a nudge letter give very careful consideration to their reply and do not ignore it. In the event that a full reply cannot be provided within the 30 day period due to the current exceptional circumstances, this should be explained to HMRC.

Those in receipt of a letter should review their circumstances and consider why they may have received it. There may be an unknown liability as a consequence of a failure to take advice or due to a misunderstanding of the complex UK tax rules. Since the deadline for the requirement to correct expired at the end of September 2018, persons with undeclared income and gains may be liable to significant penalties of up to 200% of the tax owed. It may be possible to take steps to mitigate the effect of such penalties and it is important that expert advice is taken about this.

If you have any questions prompted by this note, or on any related matter relevant to you, please get in touch with a member of the Regulatory team.