Laurence Lieberman and Sanjvee Shah, partners at international law firm Taylor Wessing, outline the troubles that can ensue when the lines between personal and company assets blur.

Laurence Lieberman and Sanjvee Shah, partners at international law firm Taylor Wessing, outline the troubles that can ensue when the lines between personal and company assets blur.

In certain Middle East and Far East jurisdictions, the founding shareholders of highly-successful private businesses can blur the distinction between their personal assets and their company's assets.  This is perhaps understandable when those individuals have built an industrial enterprise from nothing and consider themselves synonymous with their business. Typically the equity in these companies is tightly held, often exclusively family-owned and the founding patriarch or matriarch also wields a dominant influence over the management and operation of the company.

With the mindset this produces, it can be common for those owner/managers to have the company purchase certain assets, using the company's funds, where the assets are intended for their personal use.  Typical assets would include residential property or "trophy" assets such as yachts, cars or works of art.  There would then either be an express or more often implied licence for the owner/manager to make use of these assets at his or her will. 

The danger with these arrangements is that in the event of a dispute involving the company, these assets may be ripe for attack through enforcement of judgements or awards, or other legal remedies such as freezing orders or orders for delivery up.  Due to the emotional attachment to these assets and the fact that prior to a dispute they had been enjoyed without restriction for often long periods of time, this type of intervention can cause a great of deal of stress and worry for both the company and the founder shareholders.  

A case study to illustrate this issue:

A Malaysian company is the registered proprietor of a residential property in the UK.  The property is used by the super-majority shareholder and managing director for her holidays and other visits to the UK.  The property has been pledged to the company's bank as part of a larger security package in respect of a significant credit facility extended to the company.  The company becomes embroiled in a dispute with a US company that eventually comes before the English court. The US company obtains a substantial damages award from the court against the Malaysian company and proceeds to enforce that award against the company's various assets around the world, including the UK property.  There is also a prized work of art in the property which the CEO bought at a gallery on holiday over 10 years earlier but she cannot easily locate evidence of the purchase.  The US company asserts that because the company owns the registered interest in the property, the contents of the property are also owned by the company.  It sends a bailiff in to seize the contents of the property.   

This is a difficult scenario to manage and resolve. Rapid and creative legal advice is required in order to protect the CEO's interests and the company's interests - and these may be different of course.  There is also the bank's interests to consider and these may conflict with the CEO's and the company's, particularly because typically a lender may not be interested in the particular characteristics of its security as long as the value of the security is sufficient to cover the borrowing in the event of a default.  On the other hand, the company and the CEO may well wish to protect the specific property that is the subject of attack.

One option might be to look at whether the bank can enforce its security and take possession of the asset or appoint a receiver over it.  This will depend on the rights and obligations in the security and other contractual documentation.  There may be other legal routes to challenge ownership and so carve it out of the company's asset pool for enforcement purposes. 

Heading off trouble

It is of course preferable to avoid this scenario in the first place.  Careful thought should be given as to how an individual's personal and business assets are to be held and the implications of holding these assets personally and via a corporate structure (including by a subsidiary of the company which does not contract to do the company's main business) or an alternative holding structure such as a trust.  It would also be necessary to consider, in many cases, the jurisdictions which are most appropriate to protect the underlying assets from the potential litigation risk outlined above. Also, it should be considered if the assets are held via some ownership structure other than personally, how these structures are administered and controlled on a day to day to basis to ensure that the integrity of the arrangements is preserved, proper record keeping is observed and the principal is as far removed as possible from the underlying assets depending on the chosen ownership structure.

Ironically, pledging the asset as security may give the chargee superior rights to a judgment creditor, thus distancing it from enforcement, provided relationships between the corporate borrower and lender are sufficiently strong and aligned for this to result in the practical protection of the asset.  This requires careful planning and expert legal advice should be sought long before a dispute scenario arises, ideally before the underlying assets are actually acquired to ensure that the ownership arrangements are as robust as possible from the outset.