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 England and Wales 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 most at risk of being unwound share a 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 or close to it, or an insolvent liquidation or administration is probable, the law requires you to take account of your creditors’ interests.

You must give those interests real weight alongside the shareholders’, and once an insolvent liquidation or administration is inevitable, creditors’ interests come first. That rule 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. If the court then makes a winding-up order, section 127 voids any disposition of company property made after the petition was presented, including payments from the company bank account, unless the court validates it.

Selling assets after that point, without a validation order, risks the sale being void if a winding-up order is made. The buyer can lose the asset, and you face 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. A pre-pack is far easier to defend when the business was properly marketed and the record was made at the time, not reconstructed afterwards.

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 with the first notice to them, and in any event within seven days of the sale.
• An independent evaluator’s report or the creditors’ approval under the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 where the buyer is a connected party. One of the two 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.

Once a creditors’ voluntary liquidation is under way, the decision can move out of your hands quickly. 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 Insolvency 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”).

If you breach section 216, section 217 makes you personally liable, jointly with the new company, for its debts incurred while you were involved in managing it. 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 buys the whole or substantially the whole of the old company’s business from an officeholder, and before you act under the name you send notice to every creditor whose name and address you know or can reasonably find, and publish it in the Gazette. The notice must go out no later than 28 days after the sale completes.
• Second excepted case (rule 22.6), if you apply to the court for permission under section 216 within seven business days of the liquidation, you can act for up to six weeks, or until the court decides, whichever is sooner.
• 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.

A common error is sending the notice to the marketing list instead of the full creditor ledger, which is easy to fix 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, whoever the buyer is.
• Preferences (s.239), where your company did something that put a creditor (or guarantor) in a better position in an insolvent liquidation than they would otherwise have been, and it was influenced by a desire to do so. 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 should be able to show 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 undervalue, 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 unless the court has made a validation order. If a winding-up order is made, the liquidator takes over and deals with the assets.

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