Legal Comment: A pain in the asset Company directors must be very careful not to make a wrong move when taking defensive action to protect their assets, write Ailbhe O’Neill In the current economic climate, the construction industry is, according to all of the media coverage, under siege. The bad news is that evasive action is not always possible. Indeed, it could land you in very hot water with the law and could impact on your ability to continue in business going forward. This month’s article looks at the pitfalls that company directors in the construction sector need to avoid in the coming months. It focuses on the way in which the law can frustrate attempts to protect assets. Next month, I will explore the issues of directors’ salaries and fraudulent and reckless trading. Some company directors, seeing a potential wind-up of the business coming down the line, might be tempted to start taking defensive action by moving assets between companies or transferring them to individuals. The law preclude this type of defensive manoeuvre in a number of ways through rules which are designed to protect the creditors of companies which are in financial difficulty. First, a transfer of assets out of the company may be caught under the Companies Acts as a fraudulent disposition of property. A creditor, contributory or the liquidator can make an application for the return of the assets or the proceeds of the asset to the company. The court can make an order to return against anyone who has the use, possession or control of the property or any proceeds or development of the property. This will only kick in where the court is satisfied that the disposal of the asset perpetrated a fraud on the company or its creditors or members – it should not affect sales for market value which are concluded in good faith.

Apart from moving assets directly out of the company, another tempting manoeuvre for the cash poor company can be to favour one large creditor over the others whether by making a payment or providing additional comfort by way of security. If this is done within the six months running up to a liquidation of the company, it will count as a fraudulent preference under the Companies Acts. This means that any such preference can be rendered void – as if the preference never happened. This rule applies when the company is insolvent i.e. unable to pay its debts as they fall due at the time of any preferential transaction. It is important to note that this rule applies even where the directors of the company might reasonably have believed that the company would recover and would survive. There are special rules regarding payments to what the Companies Acts call “connected persons”. Connected persons include directors of the company and shadow directors and relate companies as well as family members of directors – their spouse, sibling or child. Any preference shown to these persons (or their trustees, guarantors or sureties) in the two years preceding a wind up is a fraudulent preference as well. Again, it does not matter that it might have been reasonable to suppose the company could trade out of its difficulties. As well as the rules described above, the law also has special rules about granting security in the 12 months running up to a liquidation. These rules concern the floating charge – a form of security over the assets of the company as a whole rather than just certain identifiable assets. The law provides that a floating charge granted in the 12 months preceding the winding up of a company may be set aside unless it can be shown that the company was solvent at the time the security was given. Floating charges in favour of connected persons can be caught in the two years preceding a wind up. Once a company is insolvent, great caution needs to be exercised in how it deals with its assets. As can be seen the law places restraints on the extent to which the assets of companies can be protected against a future wind up. Directors seeking to move assets around in the current climate should err on the side of caution. Ailbhe O’Neill is a barrister-at-law This article appears in the November 2008 edition of Irish Construction Industry Magazine