This is one of the most common issues which comes up in the context of group reorganisations or intercompany agreements. Although it may have been intended to put in place a new arrangement by a particular date – often a year end – that date may now have passed. The question is: can the documents be backdated?
The short answer is ‘no’. Giving a document a date which is earlier than the date when it was actually signed, would almost certainly constitute fraud. Obviously the ideal position is to put in place the legal documents in advance.
So what is possible in this situation? Well, it depends on what was transferred, and whether it can be said that the relevant transaction has already happened.
Documenting a transaction which has already happened
One possible scenario is that the relevant transaction has already happened, but just hasn’t been documented yet. For example, there may have been a transfer of trade from one group company to another on a particular date. As from that date, customers may have been invoiced by the transferee, employees may have been paid by the transferee, and accounting entries may have been made to reflect the purchase price payable for the assets. Together, these factors may indicate that the beneficial interest in the relevant assets has passed from a legal point of view.
In this situation, it may be possible to create a document after the event which recites what actually happened, and which records the key terms of the transaction. The document should be dated when it is actually signed, but it can refer to the historic effective date of the transaction. The transaction should be ratified by minutes or resolutions of the participating entities.
There are some cases where this approach is not possible. For example, a reduction of share capital using the UK solvency statement procedure only takes effect in law when it is actually registered with Companies House. So any attempt to rely on the reduction before registration would be ineffective.
You will also need to consider two other things from a legal perspective. Firstly, additional formalities may be needed to complete the legal transfer of assets or granting of rights. These may include registering the transfer of land or intellectual property rights, or obtaining third party consents or releases.
Secondly, the transfer may trigger liabilities, such as where the relevant group companies participated in a defined benefit pension scheme. Even though the transaction may have already happened in substance, it’s important to find out what the other legal consequences may be, so that steps can be taken to mitigate the risks.
These two general areas mean that some legal due diligence should be carried out to identify and address areas for corrective action.
Documenting a transaction which has not yet happened
In other cases, it may not be possible to say that the relevant transaction has already taken place – but you may still want to achieve a ‘backdated’ effect. In this situation, it may be possible to put in place an agreement now, with a historic ‘effective date’.
For example, the selling and buying companies participating in a business transfer may agree between themselves to treat the transaction as if it happened at the previous year end. This could involve putting in place a business transfer agreement now, which is dated when it is actually signed. The agreement could specify, amongst other things, that costs and revenue would be apportioned by reference to the historic effective date, with adjusting payments being made accordingly. This type of arrangement would not bind third parties, but it may be effective from an accounting and tax perspective depending on the length of time which has elapsed since the intended historic effective date.
The same considerations as regards legal and other due diligence would apply so as to manage the risk of any unintended liabilities being triggered, and to make sure that the legal transfer of the relevant assets is completed.
It can be very tempting just to ‘backdate’ documents, with the intention of making life easier. This is never a good idea. With a bit of thought and investigation, is it often possible to achieve a result which gets close to the desired result and also lets you sleep at night.