Can you Sell Your Insolvent Business?

It is Friday evening. You have been at the desk since seven, the HMRC letter is still open, and a contact from the trade has just offered to “take it off your hands”, the brand, the vans, the customer list, for a pound. No valuation. No marketing. A handshake by Monday.

Selling an insolvent company in the UK is possible, and sometimes it is the best outcome for your creditors. But the route you take matters. Sell through a proper formal process, and you preserve value, jobs, and your own position. Sell on the back of a Friday handshake, and you have walked the company into section 238 of the Insolvency Act 1986.

Below, we set out the legal routes that work and the dangerous versions that land directors in personal-liability territory. In the pre-pack and CVL files we handle, the transactions that unwind later almost always share the same profile: an under-valued asset, a connected buyer, and no contemporaneous marketing record.

Is It Legal to Sell an Insolvent Company?

Yes, in principle, but almost always through a formal insolvency process. Once your company is insolvent on the cash-flow or balance-sheet test in section 123 of the Insolvency Act 1986, your fiduciary duty pivots.

The primary beneficiaries of your decisions become the creditors, not the shareholders. That shift is set out in BTI 2014 LLC v Sequana SA [2022] UKSC 25, and it changes what “selling” can lawfully look like.

On that Friday evening you are thinking “sale”. The liquidator appointed six months later will be thinking “transaction at undervalue”. Those are two different readings of the same handshake.

The formal processes, administration pre-pack, asset sale in liquidation, and (rarely) a CVA-based sale, exist to put the transaction inside a framework where a court, an officeholder, and a creditor body can see the workings.

A petition already advertised in the London Gazette changes the picture again. From the moment of presentation, section 127 voids any disposition of company property, including payments from the company bank account, unless the court validates it.

Selling assets after that point, without a validation order, creates a transaction that is legally null. The buyer gets nothing. You get the personal-liability exposure.

Pre-Pack Administration: The Standard Route to Sell an Insolvent Company

A pre-pack administration is the usual structure when a viable trading business sits inside an insolvent shell. The sale is negotiated before the administrator is appointed under Schedule B1 of the Insolvency Act 1986, and executed on their appointment.

The administrator’s duty runs to the creditors as a whole. Statement of Insolvency Practice 16 governs how the sale is evidenced, marketed, and reported to them. In the pre-packs we see reviewed by the Recognised Professional Bodies, the ones that survive challenge have a documented marketing trail before the IP was even instructed, not a retrospective reconstruction.

SIP 16 in practice requires:

• A genuine marketing process, evidenced in writing. A single approach to one buyer is difficult for you to defend.
• An independent valuation of the business and assets by a qualified valuer, not the buyer’s figure.
• A written SIP 16 statement to creditors within seven days of appointment.
• Referral to an Evaluator under the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 where the buyer is a connected party. The Evaluator’s opinion is a statutory requirement, not an optional extra.

The pre-pack works when it preserves going-concern value that would vanish in a trading administration. It protects jobs, customer contracts, and the brand premium.

The trade-off is reputational. Unsecured creditors frequently recover little, and the speed of the deal reads, to the supplier waiting on a £40,000 invoice, as insiders looking after insiders. The 2021 connected-party rules were a direct response to that complaint.

Selling an Insolvent Company’s Assets in Liquidation

Once your company enters liquidation, the business is no longer being sold as a going concern. The liquidator, now in post, sells the assets, often via a chattels auction, a specialist plant broker, or a direct sale to a buyer who approaches the officeholder.

Your role at that point is one of cooperation, not control. You provide records, attend interviews, sign the Statement of Affairs. Offers to buy assets go to the liquidator, not to you.

In the cases we take on after a creditors’ voluntary liquidation is under way, directors are often surprised by how fast the decision moves out of their hands. The van fleet can be lifted inside a fortnight.

If you personally want to buy the assets back into a new company, you can do so, at an arm’s-length price evidenced by valuation, paid in cleared funds, with phoenix restrictions addressed. A director buying back the plant for 40p in the pound, on deferred terms, with the same customers and the same trading name, is the transaction that generates a section 216 prosecution.

Phoenix Restrictions: Why Reusing the Name Can Be a Criminal Offence

Section 216 of the Company Directors Disqualification Act 1986 prohibits you, as a director of a liquidated company, from being involved for five years in any business using the same or a similar name (a “prohibited name”). Section 217 makes you personally liable for the debts of the new business during the prohibition. Breach is a criminal offence, not merely a civil one.

Three statutory exceptions exist, under the Insolvency Rules 2016:

• First excepted case (rule 22.4), the new business has bought the whole or substantially the whole of the old company’s business from an officeholder, and notice has been given to all creditors of the old company within 28 days.
• Second excepted case (rule 22.6), permission from the court on application before or shortly after taking up the prohibited role.
• Third excepted case (rule 22.7), the new company has been using the name for the 12 months before liquidation and has not been dormant.

The notice-to-creditors route is the one most directors rely on after a pre-pack, and it is also the one most often fumbled. Late notice, missing creditors, a slightly different list format, and your exception falls away.

Where we see clients tripping up, it is usually because the notice went out to the marketing list instead of the full creditor ledger, a fix that takes two weeks in the planning and ten minutes if caught before the sale completes.

Transactions at Undervalue and Preferences: The Clawback Risk

The dangerous sale is not the noisy public one. It is the quiet one to a spouse’s company for a pound, on a handshake, the week before the winding-up petition.

Sections 238 and 239 of the Insolvency Act 1986 let a liquidator challenge two categories of transaction:

• Transactions at undervalue (s.238), where your company received significantly less than the value it gave. Lookback: two years before the onset of insolvency for connected parties.
• Preferences (s.239), where your company did something that put one creditor in a better position than others, with a desire to prefer. Lookback: six months for unconnected parties, two years for connected parties.

A director who signs the company’s van fleet over to a new company they own, for £1, on the eve of liquidation, is the textbook section 238 case. Re M.C. Bacon Ltd [1990] BCC 78 remains the reference point on what “desire to prefer” means for section 239.

The court can reverse the transaction, order payment of the shortfall, and feed the liquidator’s evidence straight into a disqualification report against you.

Directors’ Duties When Selling an Insolvent Company

Once your company is in the zone of insolvency, your duties pivot toward creditors. Any sale process you run must satisfy four things:

1. Best price reasonably obtainable, evidenced by marketing, valuation, or both.
2. Independence of the valuation, not the buyer’s figure on the buyer’s headed paper.
3. Transparency, a documented process that a liquidator or administrator can later justify to creditors.
4. No unfair preference, the sale does not hand value to a connected party on better terms than an arm’s-length buyer would have received.

Your minutes matter. A liquidator reviewing the transaction two years after the event does not read board minutes to find what was decided, they read them to find what was not decided: the valuations not obtained, the alternatives not considered, the conflicts not declared.

Valuation in Distress: What an Insolvent Company Is Actually Worth

Distress valuation is not an EBITDA multiple with a discount. Two base methods apply, and the gap between them is where your sale disputes arise:

• Going-concern value, what a buyer will pay for the trading business as a continuing operation, assuming key staff, customers, and contracts transfer. This is the pre-pack number.
• Forced-sale or break-up value, what the assets would realise at auction within 28 days, stripped of goodwill. This is the liquidation number. For a typical trades business it is frequently 20 to 40 per cent of the going-concern figure.

Our office will typically instruct an independent RICS-qualified or specialist insolvency valuer to produce both figures for you. The decision between routes turns on that comparison, not on what you hope the business is worth. If the break-up value exceeds the going-concern offer on the table, the pre-pack does not satisfy your duty, no matter how tidy the narrative is.

Your Next Step on Selling an Insolvent Company

The real problem is rarely “can I sell?”. It is “can I sell in a way that survives a liquidator’s review in three years?”. Two groups read this page, and your next call is different in each case.

• If a buyer has approached you and no petition has been presented, you can still choose the route. Call a licensed insolvency practitioner this week, not next month. A properly marketed pre-pack or an orderly liquidation with asset sale is achievable; a handshake sale over the weekend is not.
• If a winding-up petition has already been advertised, stop. Section 127 has bitten. Do not transfer assets, pay suppliers selectively, or move customer contracts until a validation order is in place or the liquidation process is running.

Our licensed IPs can review the sale on your table, flag the SIP 16 and section 216 issues before they crystallise, and run the process so the transaction is defensible at creditor-meeting stage. Call us free on 0800 074 6757 for confidential advice.

FAQs on Selling an Insolvent Company