Distributions - non cash assets - distributions in kind - intra group reorganisations and transfers

CA 2006 removes doubt about when the transfer of a non-cash asset to a member amounts to a distribution.?

Where there are distributable profits - CA 2006 aplies - book value is the anchor point

Where a company has distributable profits and transfers an asset to a member at a value at least equal to book value, the amount of the distribution is zero.? Where a company has distributable profits and transfers an asset to a member at less than book value, there will be a distribution of an amount equal to the difference between book value and the transfer consideration. Whether the transfer can be made lawfully depends on whether the transferring company has distributable profits at least equal to this difference in value.

The company's profits available for distribution are treated as increased by the amount (if any) by which the amount of the consideration for the disposition exceeds the book value of the asset, once again, so long as some distributable profits exist.

Where there are not distributable profits - common law applies - market value is the anchor point

If a company has no distributable profits the position is determined by common law. Where the company transfers an asset to a member at less than market value, the amount of the distribution is the difference between market value and the payment (if any) received from the member. This will continue to be unlawful as the company will not have sufficient reserves to enable it to make the distribution. Therefore, in these circumstances the transfer must take place at market value.

Section 845 only applies where a company has positive distributable assets enough to cover the distribution in kind, expressly overriding any common law rule. Common law restrictions on distributions are otherwise preserved (s851).

Background

Aveling Barford v Perion [1989] BCLC 626 established that an intra-group transfer (to a parent or sister company) of assets at an undervalue in circumstances where the transferor does not have any distributable profits is an unlawful distribution. However, two issues have remained uncertain since that decision: first, whether a transfer at book value (as opposed to market value) is a transfer at an undervalue, and secondly, the extent of distributable reserves necessary to take account of any transfer at an undervalue.

The new provisions provide certainty for companies when carrying out intra-group reorganisations that transfers of assets at book value are acceptable as long as the transferor has some distributable profits (arguably any amount of distributable profits, even ?1, would satisfy this test).

Where the transferor has some distributable profits and the transfer is at less than book value, only the shortfall between book value and the consideration received will constitute a distribution. These changes avoid the need for costly asset revaluations.

Directors will continue to need to take care that transfers of assets are made at fair market value where the company has no distributable reserves.

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