Episode 8: a corporate recovery perspective on related party transactions

Applying the arm’s length principle to intercompany transactions within a multinational group can sometimes appear to be a theoretical exercise. But if individual entities or the group as a whole experience financial distress, related party transactions are likely to be subject to scrutiny in a much more pointed way.

Office holders in formal insolvency proceedings may be under a statutory duty to investigate the conduct of legal entity directors in the months and years leading up to the insolvency, and directors may be exposed to personal liability or disqualification if they are unable to account for their decisions.

Paul Sutton and Mark Supperstone discuss this scenario from the perspective of UK entities in financial distress, and consider key questions such as:

• The key legal duties of an administrator in a formal administration process
• The first steps which an administrator would be likely to take on taking office
• The statutory duty on officeholders to investigate the conduct of directors
• How an administrator or liquidator would be likely to view transactions between the company in liquidation, and other members of the group
• Key duties of legal entity directors, and the circumstances in which they may become personally liable
• The practical steps which legal entity directors can take to minimise their exposure to personal liability
• The importance of addressing a potential situation before it develops, and getting informal advice at an early stage.