Out-Law Guide | 22 Aug 2012 | 2:30 pm | 3 min. read
Sometimes a group of companies which has reorganised itself will want to backdate some of those changes, perhaps to backdate an intra-group transfer of business so that it coincides with the previous year end.Here are some guidelines as to what may be possible from a legal perspective. Different considerations may apply from accounting and tax perspectives, and those aspects should be taken into account too.
What you can’t do
Clearly, you can’t backdate a document so that is appears to have been signed on, say, 31 December, when in fact it was signed on 15 June. This would be fraud, and would be likely to expose those involved to a number of different criminal offences.
Documenting what happened in the past
What you can do is document a transaction which has actually happened in the past which had not been formalised. For example, one group company may have lent money to another group company without documenting the arrangements in a written loan agreement.
In this case the fact that the transaction did happen is a matter of record, and the relevant records may include accounting entries as well as entries on bank statements. Similar situations may arise in relation to intra-group supplies of goods of services, or transfers of a business (where the associated transfer of employees may also be a matter of record).
In this kind of situation, the following general approach should be considered:
Ratification – it may be that the transaction can be ratified after the event by the relevant decision-making bodies (e.g. board of directors or shareholders) of each of the legal entities involved
Documentation – the relevant arrangements can be documented in the appropriate form, such as a loan agreement or business transfer agreement. It is helpful if the recitals to the agreements describe the history of what actually happened, when it happened and what evidence of this exists. The documents should be dated now (i.e. when actually signed), but can refer to the historic transaction date.
Formalities – in some cases specific legal formalities may need to be complied with in order to perfect the transaction. For example, a transfer of land may need to be documented in writing and registered in order to be effective. You will need to analyse the different elements of the transaction and consider whether as a matter of substance it is fair to say that the transaction did actually happen on the historic date. In the case of a transfer of assets, you may need legal advice as to whether the beneficial interest in those assets has already passed, even though some formalities still need to be completed.
This type of situation needs to be considered on a case-by-case basis to make sure that the approach of ratification / formalisation actually works.
Backdating the economic effect of a transaction which hasn’t happened yet
In other cases it may be clear that the transaction has not happened yet. But there may still be a desire to backdate the economic effect. For example, an intra group transfer of business and assets may have been intended to take place on 31 March but could not take place then because regulatory approvals were not yet in place. Those approvals may be obtained in May, and the group may still want to be able to account for the transaction as if it happened as at 31 March.
From a legal perspective, the business sale agreement could potentially be signed in June, and the agreement may specify an immediate completion date (i.e. the date when legal ownership of the assets actually passes). That agreement may also provide for a historic ‘effective date’, so that the seller and buyer agree between themselves to treat the transaction as if it happened on 31 March. This would involve, amongst other things, apportioning costs and revenue by reference to the effective date.
From a corporate governance perspective, the transaction would be approved in the normal way, e.g. by board resolutions which approve the implementation of the transaction, including the effective date as one of the commercial terms.
As mentioned above, it is a matter of accounting practice as to whether the transaction can properly be accounted for as taking place on 31 March. This is obviously something you will want to discuss with your auditors.