Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,.
He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.
Understanding transactions at undervalue is crucial for directors of UK limited companies facing insolvency.
These transactions, defined under the Insolvency Act 1986, occur when a company gives away assets or sells them for significantly less than their market value. This can have serious implications for ou, as such transactions may be scrutinised if the company is insolvent or becomes insolvent shortly after.
By familiarising yourself with these transactions, including statutory timeframes and potential consequences, you will be better able to protect your company and personal interests.
Transactions at undervalue occur when a company disposes of existing assets or makes payments such that the value received by the company is significantly less than the value given, for example by selling assets well below market value or gifting them without receiving anything in return. Under UK insolvency law, such transactions may be scrutinised if the company is insolvent or becomes insolvent shortly after.
These transactions can diminish the company’s asset pool, potentially harming creditors. Common scenarios include:
Selling assets below market value: For example, a company might sell machinery for a fraction of its worth.
Gifting assets: Transferring property or shares to another party without compensation.
Discounting shares: Issuing shares at a price lower than their actual value.
Understanding these transactions is crucial, as they can lead to investigations and potential legal challenges if the company faces insolvency.
Statutory Timeframes for Review
In UK insolvency law under the Insolvency Act 1986, transactions at undervalue can typically be challenged for a period of two years before the start of insolvency proceedings. The law makes a presumption of insolvency at the time of the transaction in cases involving a “connected” person, but the statutory ‘look-back’ period remains two years regardless of whether the recipient is connected.
These timeframes are crucial as they allow liquidators to scrutinise past transactions and potentially reverse those deemed undervalued, thereby protecting creditors’ interests.
If a transaction falls within these periods and is found to be undervalued, it can be challenged and potentially undone. This ensures that any assets transferred for less than their fair value can be reclaimed for the benefit of the company’s creditors.
Determining Connectedness
The relationship between the parties involved determines connectedness. A connected party includes directors, their family members, or businesses associated with them. Understanding these connections is vital, as it influences the timeframe within which a transaction can be reviewed and challenged.
Why Liquidators Investigate These Transactions
Liquidators investigate transactions at undervalue to maximise returns for creditors from an insolvent estate. When a company disposes of assets for less than their market value, it reduces the pool of assets available to satisfy creditor claims, potentially depriving creditors of their rightful share. This prompts liquidators to scrutinise such transactions closely.
Suspicious or poorly documented transactions often raise red flags. Liquidators are particularly vigilant about deals lacking proper valuation or appearing rushed. They delve deeper to uncover any potential wrongdoing or oversight that may have disadvantaged creditors.
Typically, liquidators seek the following evidence during their investigations:
Professional valuations of assets
Sales agreements and related documentation
Minutes from board meetings discussing the transaction
Correspondence that provides context or rationale for the transaction
This thorough investigation ensures fairness among creditors and upholds the integrity of the insolvency process. By ensuring that all transactions are conducted at fair value, liquidators protect the interests of all parties involved.
Potential Consequences for Directors
Directors found to have engaged in a transaction at undervalue face serious repercussions. The court can reverse the transaction, requiring any assets transferred or sold below market value to be returned to the company, restoring its financial position.
Personal liability is a significant risk, as you may be ordered to personally contribute to the insolvent estate, covering the shortfall created by the undervalued transaction. This can seriously affect your personal finances.
You could also face disqualification from holding directorships in any company for 2 to 15 years if deemed unfit due to such transactions. Additionally, you risk misfeasance or wrongful trading claims, which can lead to further legal and financial consequences. Understanding and avoiding transactions at undervalue is crucial.
How to Avoid Personal Repercussions
You should ensure transparency and compliance to avoid personal repercussions when dealing with transactions at undervalue. You should maintain comprehensive documentation for every transaction, including obtaining professional valuations before selling or transferring assets to prove fair market value.
Seek professional insolvency advice early. An experienced Insolvency Practitioner can guide you through insolvency law complexities, helping to avoid questionable deals that could be scrutinised.
Consider these best practices:
Obtain Independent Valuations: Ensure all assets are professionally appraised before any sale or transfer.
Transparent Accounting Entries: Keep detailed records of all financial transactions and accurately reflect them in the company’s accounts.
Board Resolutions: Document board decisions with clear minutes outlining each transaction’s rationale.
If in doubt, consult a licensed Insolvency Practitioner to provide clarity and help safeguard against potential liabilities. Taking these steps protects your position as a director and demonstrates due diligence and good governance.
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 that do not appear to be for full value and/or selling assets to any third parties with whom you have some connection or with whom the company has some connection.
For more information, please call our company directors’ hotline on 0800 074 6757 or email info@companydebt.com.
Undervalued Transaction FAQs
Is there a difference between transactions at undervalue and wrongful trading?
Yes, there is a difference. Transactions at undervalue involve selling assets for less than their market value or gifting them, which can be challenged under the Insolvency Act 1986. Wrongful trading occurs when you continue to trade, knowing the company cannot avoid insolvency. Both can lead to serious consequences, but they are distinct legal issues.
What if the director did not intend to defraud creditors?
Intent to defraud is unnecessary for a transaction at undervalue to be challenged. The focus is on whether the transaction resulted in the company receiving significantly less value than it provided. Even without fraudulent intent, you can face repercussions if the transaction is deemed unfair to creditors.
Are personal assets at risk?
Personal assets can be at risk if a court finds that a director engaged in transactions at undervalue. You may be held personally liable and required to compensate the company for losses incurred due to such transactions. This can extend beyond company assets to personal financial liability.
Are directors automatically disqualified for transactions at undervalue?
No, directors are not automatically disqualified for transactions at undervalue. However, if such transactions demonstrate unfit conduct, the Insolvency Service may pursue disqualification proceedings. Disqualification is a serious consequence that depends on the specifics of each case.
What if the transaction happened outside the relevant timeframe?
If a transaction occurred outside the statutory review period (two years for unconnected parties and five years for connected parties), it generally cannot be challenged as a transaction at undervalue. However, other legal avenues might still be explored depending on the circumstances.
Can a transaction at undervalue be defended as fair at the time?
Yes, directors can defend a transaction by proving it was made in good faith and with reasonable grounds to believe it would benefit the company. Documenting commercial rationale and obtaining professional valuations can support this defence, demonstrating that decisions were commercially rational.
Does the location or ownership of the asset matter for scrutiny?
The location or ownership of an asset does not exempt it from scrutiny if it is involved in an undervalued transaction. Liquidators will assess whether any asset transfer unfairly reduced the company’s estate, regardless of where it was located or who owned it before or after the transaction.
