In the aftermath of the Enron scandal and the US Security Exchange Commission investigations into the accounting practices of several technology companies, questions have arisen in relation to the rules for transferring the assets of a company.

It is imperative that directors and shareholders alike familiarise themselves with their respective legislative and common law duties in relation to the disposal of corporate assets.

In Bermuda, there are two bases on which a disposition of corporate property is voidable at the instance of an eligible creditor. Such a disposition must be made under value, and the dominant purpose of the disposition must be to put the subject property beyond the reach of a person or class of persons who have a claim against the company, or may at some time have such a claim.

The term "under value" includes cases where nothing is given to the company for the transfer as well as cases where the value received by the company is significantly less than the fair market value of the property. These rules apply regardless of whether a company is solvent and even if the property is located outside of Bermuda. A creditor must fit one of several profiles in order to be eligible.

He may be a person to whom on, or within two years after the date of the transfer, the company owed an obligation that remains unsatisfied on the date of the action or proceeding to set aside the disposition.

Or he may be a person to whom, on the date of the transfer, the company owed a contingent liability (a liability which may arise upon the occurrence of some future event) and since that date the contingency giving rise to the obligation has occurred with the liability remaining unsatisfied.

Finally, he may be a person to whom the company owed an obligation due to a claim that he made against the company where the cause of action giving rise to the claim occurred prior to, or within two years of, the date of the transfer. There are also various doctrines under Bermuda law whereby a transaction may be set aside in the context of an insolvent liquidation. However, these doctrines should not apply provided that the company:

is solvent immediately prior to or immediately following the transfer;

the company and the recipient of the assets were acting in good faith;

there was no intention by the company of preferring, over other unsecured creditors, a person who is an unsecured creditor immediately prior to the completion of the transaction;

the parties were not motivated by a desire to remove assets from within the reach of persons who would otherwise have or obtained an interest in those assets; and the company will receive a corporate benefit from the completion of the transaction (for instance there may be a tax benefit resulting to the company as a result of the transfer). Directors stand in a fiduciary position to a company. While their duties are not identical to those of trustees, they are similar in nature. While ownership of corporate property remains vested in the company, the directors hold that property for the specified purposes of the company and any misappropriation thereof may amount to a breach of fiduciary duty. In addition, a court may declare any person (including a shareholder) who is knowingly a party to a transaction with intent to defraud creditors or for any fraudulent purpose, to be personally responsible without limitation of liability for all or any debt or other liabilities of the company. In the current climate of lawsuits and SEC investigations, both directors and shareholders should make themselves aware of their respective obligations. If in doubt, they should contact their legal counsel for advice.

Attorney Bal Bhullar is a member of the Telecommunications and Technology Team at Appleby Spurling & Kempe.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.