If your business is in severe financial difficulties and potentially insolvent, you must be extremely careful before making any transactions or disposing of any assets.

Any disposal or transfer of assets where there is potential insolvency, especially if it is at an undervalue, is likely to be closely scrutinized by any Insolvency Practitioner appointed. The penalties for either deliberately breaking the insolvency rules or failing to understand your legal obligations can be severe.

If you are unsure about your business’s solvency, what to do if you believe your business is insolvent, or what types of transactions you may consider, please contact us immediately. An objective, specialist, and highly experienced opinion can provide clarity and may also offer some legal protection by demonstrating that you have sought to act lawfully and taken advice.

What is a Transaction at an Undervalue?

A transaction at undervalue is an arrangement made by an officer of a company to transfer an asset to a third party for less than its full value or for no consideration at all. This is covered by Section 238 of the Insolvency Act 1986.

An administrator or liquidator can review transactions up to two years before the insolvency procedure begins to see if any transactions at undervalue have taken place. For the court to set aside 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
  • The asset was sold for less than its value, and the company became insolvent because of the transaction.

A possible defence to an allegation of transaction at undervalue is that the transaction was entered into in good faith and for the benefit of the business.

What is an Example of a Transaction at an Undervalue?

A company owns a piece of land that is worth £1 million. The company is insolvent and is at risk of being liquidated. A director of the company offers to buy the land for £500,000. The director’s offer is accepted by the board of directors.

This is likely to be considered a transaction at undervalue. The land was sold for less than its fair market value, and the company was insolvent at the time of the transaction. The liquidator of the company may be able to have the transaction set aside and recover the land for the benefit of the company’s creditors.

It is important to note that not all transactions at undervalue are unlawful. For example, a company may sell an asset at a discount in order to raise cash quickly. However, it is important for directors to be aware of the risks associated with transactions at undervalue and to take steps to mitigate these risks.

What Action Can the IP Take About Transaction at Undervalue?

If the administrator or liquidator believes that a transaction at undervalue has taken place, they can apply to the court to have it set aside or reversed. This means that the transaction would be undone, and the company would be restored to the position it would have been in without the transaction for the benefit of its creditors.

The aim of setting aside a transaction at undervalue is to protect unsecured creditors, who are treated equally in company insolvency proceedings. If a transaction has taken place to the detriment of creditors as a whole,

What are the Potential Consequences for Company Directors?

The ramifications for company directors who engage in transactions at undervalue can be severe, both financially and professionally.

  • Directors may be held personally liable for the losses incurred by the company as a result of the transaction.
  • Directors may be ordered to repay the proceeds of the transaction to the company.
  • Directors may be fined.
  • Directors may be disqualified from being a director for up to 15 years.
  • Directors may have their reputation damaged, making it difficult to find work in the future.
  • Directors may be subject to criminal prosecution.

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.