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Shedding a little light on the dark art of valuing assets close to Insolvency.

Directors commonly dispose of assets in an attempt to restructure and rescue their companies in the face of financial distress and possible insolvency. These disposals are never done in ideal circumstances, and often there is no time for the usual advertising efforts required to obtain the best price. Purchasers can also be “thin on the ground” if they are concerned about potential challenges to their purchase. Achieving full market value, calculated with reference to ideal circumstances, is unrealistic.

In a recent case, the liquidators of a distribution services company, which sold its principal asset for half its market value, have failed in a legal challenge against the transaction.

A judge rejected the claim that the sale amounted to a “gratuitous alienation” and ruled that the price paid was “adequate consideration” for the property.

Grampian MacLennan’s Distribution Services Limited found itself looking to dispose of its main property asset quickly, to try to settle Bank borrowings. The purchaser instructed a valuation from DM Hall, which confirmed a valuation of around £1.2 million, falling to £800,000 on the assumption of a restricted 180 day marketing period, but the Purchaser ultimately offered £550,000, and this was accepted, for a quick sale.

Grampian still failed and its liquidators decided to challenge the transaction as a gratuitous alienation, arguing that the market value of the property was roughly double the purchase price.

In the circumstances of this distressed sale, the judge, on hearing the matter, concluded that a price of £550,000 was adequate consideration, taking into account the transaction was “arms-length” and in distressed circumstances.

If you have any queries around matters raised in this post, please contact Pamela Muir, Partner, or your usual contact within the Insolvency Team.

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