Publications - Corporate
Transfer of Business Within a Group
Introduction
The aim of this note is to outline to the reader various issues which merit consideration in relation to a proposed transfer of a business as a going concern between two companies in the same group (sometimes referred to as an "intra-group" transfer or a "hive-up" or "hive-down"). Transfers of this type (from a "Transferor" to a "Transferee") often form part of a group re-organisation or follow the acquisition of a new company.
The information in this note is general and not sufficiently detailed to apply to the circumstances of any particular situation.
Property
If the assets of the Transferor include property, consideration must be given to whether or not legal title to that property should be transferred to the Transferee.
There are two alternatives:-
- transfer the legal title - this is often considered
the neatest position, especially where leasehold property is involved.
Legal title is passed to the Transferee and if the property needs to
be dealt with in the future then only the Transferee needs to be involved.
The transfer of the property should be relatively simple provided that
no additional investigation of title or condition is required by the
parties or others involved such as bankers. It may however, be necessary
to get landlord's consent; or
- don't bother - in this case as the legal title to the property will remain registered in the name of the Transferor, the Transferor will have to be kept in existence so that if the property needs to be dealt with in the future it can join in to transfer the legal title. In England (but not in Scotland) it is possible to split the legal and beneficial interests in property. If this is done the transfer agreement can transfer "beneficial ownership" of the property to the Transferee (and the value of the property will appear in the balance sheet of the Transferee) but legal title will stay with the Transferor. Choosing either of the options mentioned in this paragraph may however, in the case of leasehold property, have adverse implications under the terms of a relevant lease.
In either case therefore, the arrangements under which property is occupied will need to be thoroughly reviewed and specific advice sought.
Key Contracts
The business to be transferred may benefit from key contracts such as those with important suppliers and customers. The Transferee will therefore need to assess whether or not these contracts can be transferred into its name. Contracts may be freely transferable or consents may be required from third parties. An attempted transfer could constitute a breach of contract or give rise to rights (such as rights of termination). Whether or not the transfer of any contract is possible, constitutes a breach of that contract or gives rise to rights will depend entirely on the contract's specific terms.
Clauses are usually included in the transfer agreement which attempt to deal with contracts which cannot be assigned to the Transferee without a third party's consent. These often require efforts to be made by the Transferor to obtain consent and may, if this is not forthcoming, provide for the contract to be held on trust with the Transferee performing it as an agent. Such performance may however, itself be a breach of contract if, for example, the contract includes a widely drafted bar on others performing or sub-contracting.
A thorough review of all material contracts must therefore be undertaken.
Other Assets/Contracts
There will usually be various documents which need to be tidied up relating to other assets transferred, e.g. short term finance, leasing, hire, hire purchase, licensing and maintenance agreements. These are often dealt with in-house (with legal support where necessary). It may be that under finance arrangements the Transferor is prohibited from transferring an asset or assets without the consent of a third party.
There may also be various other people who will need to be notified of the transfer, such as the tenants of properties (who will need to pay rents to the Transferee), and service providers.
Operating and other licences may need to be transferred to the Transferee and vehicle log books may need to be amended.
Trademarks and/or patents may need to be specifically assigned and documents registered with the Patent Office.
Debts may need to be assigned and notices served on debtors.
Goodwill
The goodwill relating to the business will also be transferred since the transfer is a transfer of the business "as a going concern".
When a business is transferred as a going concern:-
- under the Transfer of Undertakings (Protection of Employment) Regulations 1981 (as amended) (commonly referred to as "TUPE") its employees are automatically transferred from the Transferor to the Transferee upon the same employment terms and conditions with full continuity of employment; and
- the transfer will probably be VAT exempt provided the transfer falls with specific VAT provisions. This is normally the case where VAT registrations are in effect (unless there is a group election in which case the transfer should be a VAT "non-event").
Market Value
Whilst the assets of the business will often be transferred for a price equal to their net book value, it is vital that the price (whether based on net book value or otherwise) is equivalent to market value. The directors of the Transferor have a duty to obtain market value and if they do not, they could be held personally liable. Also where assets are transferred at an undervalue to a company's shareholder(s) then, to the extent of the undervalue, this can be said to be a distribution and if the company does not have sufficient distributable profits then it could be an illegal distribution.
It will also be necessary to determine whether there is any market value to be attributed to goodwill.
In undertaking the necessary valuation exercise, bear in mind that the transaction may be reviewed in the future by creditors, new directors, purchasers or in a worse case scenario, insolvency practitioners.
The total purchase price is often left outstanding on inter-company loan account between the Transferor and the Transferee (often unsecured and repayable on demand) . The Group's accountants would normally advise on the steps necessary to record these loans.
Stamp Duty Land Tax
If the transfer includes transfer of land and/or buildings
(whether owned or leased), in normal circumstances stamp duty land tax
at the appropriate rate (up to 4%) would be payable. However, a relief
from stamp duty land tax is usually available if the transfer is between
group companies. The relief is claimed by submitting a land transaction
return to the Inland Revenue giving details of the properties being transferred.
The Inland Revenue may also ask for evidence of the companies' group relationship.
There are various conditions to be fulfilled if relief is to be granted
and if these cannot be satisfied the Group's auditors or property advisors
can quantify the level of stamp duty land tax payable on the value of
the property interest being transferred.
Other Matters
Specific advice should be taken to clarify obligations in relation to affected employees in particular any duties to consult or notify.
The Group's auditors would also normally advise on:
- book entries which will need to be made; and
tax. - Insurances should be reviewed.
New stationery/business forms will need to be prepared showing the correct corporate information.
Written July 2001. Reviewed
January 2004.
For further information please contact : corporate@mcgrigors.com
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