10 July 2023
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The Need to Take Care When Transferring Assets Gratuitously

To The Point

Litigators tend to spend their lives at the sharp end of when things go wrong. In so doing, they have a unique insight into what causes disputes; into what creates liability; and how to manage risk. In this series, we will share some of those insights with you, in the hope that they will help you to gauge risk, avoid disputes, protect your assets and enhance your profitability. This week, Douglas Blyth looks at the "transmission presumption" in Scots Law and urges caution where businesses or assets are being transferred for nil consideration. 

Ahead of the Game

Imagine the following scenario:

  • Company A manufactures widgets. 
  • It has supplied widgets for many years to "Widgets R Us", a business operated by Company B.
  • £100,000 is outstanding by Company B to Company A. 
  • Company B is struggling. Its directors decide to transfer its entire business and assets (comprising the Widgets R Us business) to its sister company, Company C. 
  • No consideration is paid for the transfer. 
  • Company C carries on trading the Widgets R Us business.

What can Company A do?

One option would be for Company A to sue Company B, place Company B into liquidation and thereafter hope that the liquidator can recover some value for the transfer of the Widgets R Us business. But the value of any such recovery is likely to be eroded by the liquidator's fees and claims from other creditors - and what if the business wasn't worth much? 

There is potentially another option.

In the above situation, it may be possible to argue that Company C has assumed responsibility for the debt owed by Company B to Company A. This is because of the operation in Scots Law of novation (i.e. the substitution of one party to a contract for another) and what is sometimes referred to as the "transmission presumption". 

In Sim v. Howat [2011] CSOH 115, Mr Sim retired from the partnership of Pattison & Sim. Thereafter the business of the partnership was carried on (in the same name) by Mr Howat and Ms McLaren. As a matter of law, the original partnership was dissolved on Mr Sim's departure, so Mr Howat and Ms McLaren had formed together an entirely new and separate partnership. 

The question arose as to the liability of the new partnership for a debt of the old partnership. Lord Hodge observed that Scots law:

"…has historically had a presumption that the gratuitous transfer of the assets from a sole trader or partnership to another partnership entails the recipient of the assets assuming liability for the prior debts of the business."

In 2018 a similar question arose (in Scottish Pension Trustees Ltd v. Marshall Ross & Munro and others [2018] CSIH 39) as to the liability of a firm by the name of Marshall Ross & Munro for the debts of various earlier partnerships that had all traded under the same name. In that case, the Lord President concluded that where no value is given for the assets acquired:

"…as a generality, a firm, which takes over another business and carries it on with no outward display of change apparent to a third party, will be liable for the old business's debts."

Similarly, Lord Drummond-Young advised that where the same business is passed by one partnership to another, without any consideration being paid, there is:

"…a presumption that where there is continuity of business and a transfer of assets the obligations of the old partnership are novated in such a way that they become obligations of the new partnership."

How to Stay Ahead of the Game:

In summary, care should be taken when a trading business or other assets are being transferred from one entity to another without any consideration being paid. In such circumstances, it is important to properly understand what debts might (in law) be presumed to have transferred with the assets. 

Similarly, if a debt is owed to you by a business operated by one entity and that business is then transferred to another, thought should be given to whether there might be scope for arguing that the new entity has assumed liability for the debt.

To the Point 

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