A recent case in the Court of Appeal discussed issues relating to intra-group reorganisations and highlighted the importance of considering director duties when entering into uncommercial transactions.
In HMRC v Development Securities plc and others  EWCA Civ 1705, the case concerned a group of companies with subsidiaries incorporated in Jersey and a proposed scheme to reduce the group’s capital gains tax bill. While the facts of the case are complicated and not the topic of this article, the general observations about the duties owed by directors of subsidiary companies in group reorganisations are of particular interest.
There are numerous legitimate reasons why transfers of assets within a group of companies may take place, including for specific tax purposes. If a sale of assets takes place on arms’ length terms, it is often expected that the sale price will be at or close to the market value of the assets. However, in an intra-group transaction, it might be suggested that the sale price is something less than the market value. Undervalue transactions are not automatically unlawful but raise a number of corporate law and insolvency law issues.
In a corporate reorganisation, it is not uncommon for subsidiary companies to be asked to enter into transactions that are uncommercial from the perspective of the subsidiary and the judgments from this Court of Appeal case suggest the following considerations:
- Where directors of a subsidiary company are involved in a decision that is uncommercial from the company’s standpoint, just because the proposed transaction benefits the shareholders of the company does not mean that it can be characterised as being in the company’s interests and the directors need to consider their duties to the company as well.
- It is possible that where the shareholder of the subsidiary company has specifically authorised a transaction in advance, then the directors of the subsidiary could be considered to have acted properly in proceeding with the uncommercial transaction. This could depend on the details of the subsidiary company’s constitution.
- The directors of the subsidiary company should always consider whether the proposed transaction is actually in the company’s interests and the decision-making process should be documented in detailed board minutes.