Undervalue transactions
If your business is in severe financial difficulties and potentially insolvent you will need to be extremely careful before making any transactions or disposals of assets.
A disposal or transfer of assets where there is potential insolvency and possibly at an undervalue, is likely to be carefully scrutinised by any Insolvency Practitioner appointed. The penalties for either deliberate breaking of the insolvency rules or ignorance of your legal duties are potentially severe.
If you are in any doubt about your business solvency and/or what to do if you believe your business is solvent or what type of transactions you may consider and how to protect yourself against undervalue transaction risks, please do contact us. An objective, specialist, highly experienced opinion provides clarity but also may offer some legal protection in showing you have sought to act lawfully and taken advice.
What is a Transaction at an Undervalue?
A transaction at undervalue is an arrangement entered into by an officer of the company to transfer an asset to a third party for less than its full value, or for no return at all. This is covered by Section 238 of the Insolvency Act 1986.
An administrator or liquidator can look back up to 2 years from the date the insolvency procedure commenced to see whether a transaction at undervalue has taken place. For the court to reverse or undo the transaction, the office holder must prove that the :-
- asset was sold for less than its true value, and the company was unable to pay its debts at the time of the transaction; or
- that the asset was sold for less than its value and the company became insolvent because of the transaction.
A possible defence to an allegation relating to possible undervalue is that the transaction was entered into in good faith and for the benefit of the business.
What action can the Insolvency Practitioner take?
The overriding principle of company insolvency proceedings is that all unsecured creditors are treated equally. If the administrator or liquidator believes a transaction has taken place to the detriment of the company’s creditors as a whole, they can apply to the court to have those transactions undone or reversed.
Under the Insolvency Act 1986, where a company has sold or transferred an asset for less than its full value, the transaction can be ‘set aside’ and effectively reversed. The aim of setting aside a transaction at an undervalue is to restore the company to the position it would have been in without the transaction, for the benefit of its creditors. This means the beneficiary of the transaction may have to make a payment to the insolvent company or transfer an asset back.
Protect yourself as a director
Company directors must take care to ensure that full value is achieved when assets are transferred away from the company. They must also make sure all creditors are treated in the same way and that individual creditors are not paid before others, unless the company is able to pay all of its creditors.
Any decisions that may be challenged in the event of company insolvency should be reasoned and properly considered by the board of directors and board minutes should be taken.
How can we help?
If your company might be insolvent and you’re worried about a possible transaction then stop. You should seek professional insolvency advice before entering into any transactions which do not appear to be for full value and/or sale of assets to any 3rd parties that you have some connection with or the company does. For more information, please call our company directors’ hotline on 0800 074 6757, email: info@companydebt.com.
