LCN Legal has just launched its ‘family photos’ postcard campaign to help finance and tax professionals understand key legal issues affecting group reorganisations. The first postcard deals with the issue of corporate benefit, and is shown below.
Thanks to Word of Mouth Communication for the concept and the design.
Links to the other postcards in the series can be found at the end of this article.
Every company director owes a personal duty to “exercise independent discretion” in considering each decision affecting that company. In general, the directors of a company can only take into account the interests of the wider group if they are satisfied that their own company’s interests are protected – including, in particular, the interests of the company’s creditors.
A wide range of detailed rules exist to back up this principle – including provisions dealing with wrongful trading, transactions at an undervalue, financial assistance and so on. The courts will not hesitate to hold directors to account, especially when third party creditors are adversely affected. This can involve the risk of personal liability for directors and disqualification.
In practice, the issue of corporate benefit affects two key aspects of a group reorganisation project. Firstly, at the planning stage, it is important to look at each of the proposed steps from the perspective of each individual participating company, and make sure that they make sense. Careful thought should be given before allowing a company to give away assets, waive debts, sell assets for less than they are worth, take loans subject to repayment terms it may not be able to meet, or make loans to borrowers who may not be able to repay the loan.
Secondly, the project’s decision-making process should allow the individual boards of directors to exercise proper discretion in deciding whether to approve the relevant steps. It is usually best practice to explain the proposed steps in a board paper or equivalent document, which is then circulated to the relevant directors for consideration.
Read the other postcards in this series: