What Are Transactions at Undervalue? Definition, Examples, and Consequences (Insolvency Act 1986, England and Wales)

Picture the scene. Six months before the company went into liquidation, you signed a short contract of sale moving the plant and machinery across to a connected trading entity. Price: half the written-down book value, roughly a third of the open-market auction figure. No valuation was commissioned.

Your rationale, noted later, was that the related company “needed the kit to keep trading”. The liquidator, opening the file a year on, sees one thing. A transaction at undervalue under section 238 of the Insolvency Act 1986.

In England and Wales, a transaction at undervalue (TUV) is a disposal of company assets for no consideration, or for consideration significantly less than the value moving out. If it happened within two years of the onset of insolvency and the company was, or became, unable to pay its debts, the liquidator or administrator can apply to the court under section 238 to unwind it.

The counterparty repays, or the transaction is reversed. You are the person who signed, so you are the person asked to account. The dangerous transaction is the quiet one to a connected party, not the noisy one to a stranger.

This guide walks you through the section 238 test, the connected-party presumption, the statutory defence in section 238(5), the overlap with preferences under section 239, and the court orders the liquidator can obtain under section 241.

The distinctions matter. A director who assumed the transaction was “fine because it was at book value” can end up paying money back to the liquidator.

The Statutory Definition of Transactions at Undervalue

Section 238(4) of the Insolvency Act 1986 defines a transaction at undervalue in two limbs.

• Section 238(4)(a), a gift to the counterparty, or a transaction on terms that provide for the company to receive no consideration.
• Section 238(4)(b), a transaction for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.

The test is objective. The liquidator does not need to prove dishonesty, a desire to prefer, or intent to defraud creditors. What we are asked for is a valuation of what went out and a valuation of what came in, and a court assessment of whether the gap is “significant”.

The leading authority is Re M.C. Bacon Ltd [1990] BCC 78, which distinguished a transaction at undervalue from a preference. A TUV requires an objective value shortfall. A preference requires a subjective desire to improve the creditor’s position.

In Bacon, the grant of a debenture to the company’s bank did not constitute a TUV because creating security over the company’s assets does not deplete them, so the company gave nothing measurable in money or money’s worth. If you are grappling with the same question on your facts, our notes on solvency testing and on the section 123 insolvency test will help you frame the answer.

The Two-Year Lookback and Insolvency Requirement

Section 240(1)(a) sets a two-year lookback from the onset of insolvency. Any TUV falling inside that window is potentially vulnerable.

The onset of insolvency is defined by section 240(3). In a creditors’ voluntary liquidation it is the date the winding-up resolution was passed. In a compulsory liquidation it is usually the date the winding-up petition was presented.

In administration it is the date the administration application was made, the date a copy of the notice of intention to appoint administrators was filed at court, or otherwise the date the appointment took effect. If you are counting backwards from any of those, you are inside the window.

One further condition in section 240(2) must be satisfied for a TUV to be reversible: the company must have been unable to pay its debts within the meaning of section 123 at the time of the transaction, or have become so as a consequence of it.

That is a different test from wrongful trading under section 214, which asks whether you knew or ought to have concluded that the company could not avoid insolvent liquidation or administration.

Where the counterparty is connected with the company, for example a director, a director’s spouse or a parent company, the insolvency condition in section 240(2) is presumed unless the counterparty can rebut it.

That presumption is the reason connected-party transactions are a common source of TUV claims. Our note on the Insolvency Act 1986 sets out the surrounding avoidance provisions you should be aware of.

Common Examples of Transactions at Undervalue

The transactions that end up on the liquidator’s desk rarely look dramatic at the time you signed them. The typical fact patterns we encounter are mundane:

• Selling plant or stock to a connected company. The van, the racking, the CRM licences, transferred to “NewCo” at net book value when the open-market auction figure would be higher. No valuation commissioned, no arm’s-length negotiation.
• Transferring trade premises to the director’s spouse. A lease assigned for nil premium, or a freehold sold to a family trust at a historic purchase price while the surveyor’s rebuild cost would be several multiples higher.
• Settling a director’s loan by asset transfer. The company transfers the Range Rover to the director in satisfaction of a £40,000 DLA balance, when the vehicle would fetch £60,000 on trade disposal.
• Waiving an intercompany receivable. A parent writes off a subsidiary’s £200,000 trading debt without any commercial consideration moving the other way.
• Gifting goodwill or customer lists. The client database is “migrated” to a new entity run by the same director, typically via a one-line email, with no licence fee, no consultancy agreement, no invoice.

Each of these is defensible if the company was solvent, if a fair value was received, or if the statutory defence applies. What tends to fail the test is the transaction done in a hurry, on a handshake, without contemporaneous valuation evidence.

The liquidator works backwards from what the estate should have had and asks you why it is not there. “I thought it was a fair price” is the answer that loses.

The Defence Under Section 238(5)

Section 238(5) provides a two-part statutory defence. The court will not make an order if the respondent shows that the transaction was entered into by the company both:

• In good faith and for the purpose of carrying on its business; and
• At the time it was made, there were reasonable grounds for believing that the transaction would benefit the company.

Both limbs must be satisfied. “Good faith” is a subjective honesty test: did you and your fellow directors genuinely act with the company’s interests in mind? “Reasonable grounds” is an objective test: could a reasonable director in the same position have believed the transaction would benefit the company?

In practice, the defence lives or dies on contemporaneous documents. Board minutes that record why the transaction was considered commercial. A written valuation from a qualified third party. Correspondence showing the commercial logic.

We prepare directors for this test by asking a simple question: “If the liquidator reads your file two years from now, will the file tell them the answer, or will it tell them you did not document the answer?” If you cannot confidently say the former, the transaction is exposed.

Good faith plus optimism is not the defence. In practice, the defence rarely succeeds without a commercial rationale documented at the time.

How Transactions at Undervalue Differ from Preferences

Section 238 (TUV) and section 239 (preferences) sit next to each other in the Act and are frequently pleaded in the alternative. The distinctions matter because the tests, the lookback periods, and the defences are different.

• Test. TUV asks an objective value question: was the consideration significantly less than what was given up? Preference asks a subjective question: was the company influenced by a desire to produce a preferential result?
• Lookback. TUV is two years ending with the onset of insolvency. Preference is six months, extended to two years where the creditor is connected with the company (other than only as an employee).
• Defence. TUV has the good-faith-and-reasonable-grounds defence under section 238(5). Preference has no equivalent statutory defence. Where the creditor is connected, the desire to prefer is presumed and the respondent must rebut it; otherwise the liquidator must prove it.
• Counterparty. TUV typically targets asset transfers to connected purchasers. Preference typically targets payments to specific creditors.

A single transaction can engage both sections. Repaying a director’s loan by transferring company plant to you, for example, may be both a preference (because it advances you as a creditor ahead of others) and a TUV (if the plant was worth more than the loan balance being settled). When both sections bite, the liquidator will plead them in the alternative and recover on whichever succeeds.

The Court’s Powers on a Transaction at Undervalue Claim

Where the court is satisfied that a transaction at undervalue has occurred within the relevant window and the defence does not apply, section 241 gives it a wide menu of remedies. The court may make “such order as it thinks fit” to restore the position. Typical orders include:

• Revesting the asset in the company, so the plant, premises, or goodwill is treated as never having left.
• Paying the shortfall into the estate, the difference between what was paid and the true value of the asset.
• Releasing any security granted as part of the transaction.
• Ordering repayment of benefits received by the counterparty, plus interest.

Section 241(2) protects third parties who acquired the asset from someone other than the company in good faith and for value. If they knew the relevant facts, or are connected with the company or the counterparty, the law presumes they did not act in good faith unless they show otherwise.

That protection is narrow. A connected company, a spouse, a director’s family trust: if they were the counterparty, the protection does not apply to them at all.

The costs position is also worth flagging. If the claim succeeds, the respondent typically pays the liquidator’s costs of the application. If it settles, we usually see the settlement figure include a contribution to costs.

Either way, the commercial decision to fight a TUV claim is rarely economic below a certain threshold. A negotiated partial repayment often lands before trial, and that is what you should price in when assessing exposure.

What Directors Should Do Before a Transaction at Undervalue Risk Crystallises

If the company is under any financial pressure and you are about to transfer an asset, release a debt, or transact with a connected party, the practical protections are limited but important.

• Commission a written valuation from a qualified independent party. For plant and machinery, an auctioneer’s opinion. For property, a RICS Red Book valuation. For goodwill, a business valuer.
• Minute the decision fully at board level. Why the transaction is being done, what the commercial benefit to the company is, why the price is fair. A one-line “noted and approved” is not enough.
• Get professional advice on the solvency position. If the company passes the section 123 tests comfortably now and can pay its debts as they fall due, record the evidence. For a connected-party transaction the law presumes insolvency, and that evidence is what lets you rebut the presumption.
• Consider whether the transaction can wait. If insolvency is in sight, any connected-party asset transfer will be examined microscopically. Waiting for a formal process, where the IP can run a competitive sale, protects the director from both TUV and preference exposure.

Our guide to director personal liability sets out how avoidance claims interlock with wrongful trading, and our note on HMRC pressure explains why HMRC arrears in particular accelerate the onset-of-insolvency clock. A ten-minute conversation before you sign typically costs less than a five-figure clawback application afterwards.

Your Next Step on Transactions at Undervalue

The honest verdict splits directors into two groups. If you are thinking about a connected-party transfer and the company is solvent, well-financed, and trading comfortably, your exposure under section 238 is low. A documented valuation and minuted board approval is the housekeeping that closes the door behind you.

If the company is under cash-flow pressure, has creditors chasing, or has been refused credit in the last six months, the position is different. Any transaction at undervalue made in the two years before the onset of insolvency is vulnerable, and if you or another connected person received the asset, the connected-party presumption shifts the evidential burden onto you.

The window for a clean transfer is already closed. What you need now is a formal process that runs the sale at arm’s length through a licensed IP, where the valuation is independent and the transfer is on the record.

Call Company Debt free on 0800 074 6757 for a confidential review with one of our licensed insolvency practitioners. We will walk through any recent connected-party transactions, model the section 238 and section 239 exposure, and set out whether a CVA, a pre-pack administration, or a creditors’ voluntary liquidation is the cleaner route. Nothing is charged until you instruct us.

FAQs on Transactions at Undervalue