When dealing with transactions between companies within a group there are certain unique issues that arise that it would be important for the directors of the companies to be aware of. While the landmark case of Salomon v Salomon & Co established the principle of separate legal personality for companies and their members it remains possible, in certain circumstances, for the “corporate veil” to be lifted and for two connected entities to be treated as one. It follows that it is important for directors to be aware of this in the management of a company’s affairs to avoid taking on the obligations of another company within the group.
While the definitions of what constitutes subsidiary and holding companies are contained in Sections 7 & 8 of the Companies Act 2014, it can in practice be difficult to establish the relationship between companies and it is in fact possible for a subsidiary company to have more than one parent. In other cases, it can be quite evident that the relationship of parent and subsidiary exists.
Intra-Group Transactions
Where an intra-group transaction is being contemplated it would be important that directors be conscious of Section 117 of the 2014 Act which stipulates that a company may not make a distribution except out of the profits available for that purpose. In circumstances where a distribution is made otherwise than in accordance with Section 117, the directors could expose themselves to being held personally liable.
It is common when dealing with intra-group group transactions for the companies to attempt to transfer the assets in question at book value. While previously there was a degree of uncertainty as to the legality of such a transaction, the 2014 Act has clarified the situation and now provides that, where a company has distributable profits and makes a relevant transfer of an asset at book value, the company makes a distribution, but the value of the distribution is zero. Where the value of the transfer is less than book value the difference between the book value and the consideration received is held to be the amount of the distribution and the distributable reserves of the company must be sufficient to cover this. When arranging such an intra-group transaction directors should also be aware of and consider their fiduciary duties owed to the company as well as whether the transaction could be held to be financial assistance as prohibited under Section 82 of the Act while also considering the provisions relating to insolvency in the 2014 Act.
Director’s Duties
Section 228 of the 2014 Act has codified many of the common law director’s duties and directors should be aware of these. It should also be stressed that a director owes its duty to the company of which it is a director and not to the parent or corporate group. In many cases however the interests of the company and the group correspond, and this may not be an issue. It can be the case that that a person may be a director of several companies within a group where the interests are not shared, and this can cause significant issues.
Guidance for Companies and Directors
When dealing with a group of companies there are certain actions that the directors of the various companies within a structure can take to ensure good governance especially with regards to intra-group transactions.
First and foremost, it is important that every director is cognisant of his or her duties. It would be also advisable that the boards of each company are not comprised of the same directors as this could lead to issues should the interests of the companies not correspond as stated above. Declarations of interests in group companies should also be made where appropriate.
It would also be prudent for each individual company to have separate board meetings and for the details of such meetings to be kept as well as details and documents regarding any transactions. The giving of directions by a parent to the board of a subsidiary should also be avoided.
With regards intra-group transactions specifically it should be evident and clearly documented as to which companies are party to the particular intra-group transaction. It would also be important to ensure where possible that such a transaction is conducted at arm’s length and for the financial position of the companies be appropriately monitored.
Professional advice should always be taken before acting on any of the matters discussed. Please contact a member of our team should you wish to discuss this topic further.
