When Asset Stripping Goes Bad

When Asset Stripping Goes Bad


The Companies Act provides a liquidator with a number of options for recovery against third parties (including directors) when a company has been subject to asset stripping.


When a company is placed into liquidation, the liquidator has various powers and duties under the Companies Act, including reviewing transactions at undervalue and insolvent transactions.


What is less well known is that the IRD can also come knocking on the directors door for company tax in cases where asset stripping of the company has occurred.


The powers available to the IRD, which can apply to any company (whether in liquidation or not) are designed to permit the IRD to recover shortfalls in income tax personally from directors and shareholders (controlling or interested shareholders) of a company which has entered into a transaction or arrangement which has stripped the company of its assets such that it cannot meet its tax liabilities.


The key section of the Income Tax Act dealing with asset stripping, and the IRD’s ability for recovery (section HD 15) applies when:

  •  an arrangement has been entered into in relation to a company; and
  • an effect of the arrangement is that the company cannot meet a tax liability (the tax obligation) whether existing at the time of the arrangement or arising after that time, for income tax act, penalties and interest;
  •  it is reasonable to conclude that—
    (i) a purpose of the arrangement is to have the effect described above; and
    (ii) if a director of the company at the time of the arrangement made reasonable inquiries, they could have anticipated at the time that the income tax liability would, or would likely, be required to be met.


What is important to note from this section is that the inability of a company to meet its tax liability (present or future liability) as a result of entering into an arrangement only has to be an effect, not the only effect or the main effect of the arrangement or transaction.


In addition, while there needs to be a purpose of not meeting the company’s tax liability, this does not need to be the dominant purpose of the arrangement or transaction.


The conclusion from the above is that in cases where a company is undergoing restructuring or divestment of assets, directors and shareholders need to ensure they have obtained  sound legal, accounting and tax advice to preserve the benefit of the corporate veil and limited liability.


The good news: Gerry Rea Partners has significant experience in providing business restructuring advice.

The boring bit: The above is not tax advice and should not be relied upon as such.



Matt Kemp