With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
PAYE arrears letters from HMRC are piling up, the landlord is threatening lock-out and a well-meaning colleague suggests, “Just move the van into a new company, sort the rest later.” Pause. UK insolvency law allows liquidators, administrators and the courts to investigate and challenge suspect asset transfers made before insolvency. Transactions that unfairly reduce the assets available to creditors can be reversed, and directors may face personal consequences.
The wrong move now can cost not only the van but also your own savings and future board seat. Read on for practical, lawful routes, all in plain English.
The quick answer: why pre-insolvency asset transfers raise red flags
Moving assets out of a struggling company is rarely the quick fix it seems. The moment insolvency is on the horizon, every transfer is examined closely. Insolvency practitioners and courts can challenge deals that appear to short-change creditors, even if the paperwork looks tidy.
In practice, any sale, gift, repayment or grant of security that favours directors or their circle becomes prime territory for investigation.
The statutory tests usually focus on three questions:
Was the company insolvent at the time, or did the transaction cause insolvency?
Did the deal happen within a statutory “look-back” period?
Was the transaction at an undervalue or did it unfairly prefer one creditor over others?
Where those conditions are met, several consequences may follow:
Claw-back: a court can order the asset or its value returned to the company
Personal liability: directors may be ordered to contribute to the company’s assets
Disqualification: bans of 2 to 15 years under the Company Directors Disqualification Act 1986
Criminal investigation: in cases involving dishonesty or fraud
Next, see how your legal duties change once insolvency becomes likely.
When director duties switch to protecting creditors
Once directors know, or ought reasonably to know, that the company is likely to become insolvent, their responsibilities shift.
Section 172(3) of the Companies Act 2006 provides that the duty to promote the success of the company is subject to any rule of law requiring directors to consider the interests of creditors. In practice, when insolvency becomes likely, creditor interests take priority over shareholder interests.
Courts judge this point objectively: would a reasonable director, with the same information, have concluded insolvency was likely?
Warning indicators can include:
Warning signs you have crossed the line
Cash-flow test fails: the company cannot pay debts as they fall due
Bank withdrawing facilities or refusing further lending
Waiting until formal insolvency begins may be too late. Liability for wrongful trading (s.214 Insolvency Act 1986) can arise before an administrator or liquidator is appointed.
What counts as an asset transfer before insolvency
Any transaction that reduces the company’s pool of assets shortly before insolvency can be scrutinised.
An asset includes almost anything of commercial value:
Typical examples include:
selling company vehicles or equipment
transferring stock or work-in-progress to another company
moving intellectual property such as trademarks or software
repaying a director’s loan ahead of other creditors
granting new security to a creditor shortly before insolvency
paying dividends when the company is financially distressed
Scenario
A director realises a company van could fetch £6,000 at auction. Hoping to keep it in the family, she sells the van to her spouse for £1. Six months later the company enters liquidation.
The liquidator may apply to court to reverse the transaction or recover the difference between the sale price and market value.
Statutory tests directors must pass
Several provisions of the Insolvency Act 1986 allow office-holders to challenge pre-insolvency transactions.
A director may defend a transaction if they can show it was made in good faith and for legitimate business reasons, but the evidential burden can be significant.
Four potential consequences every director faces
Transferring assets before insolvency can trigger several types of legal action.
Asset or cash claw-back
Liquidators or administrators can apply to court to reverse transactions under sections 238, 239 or 423 of the Insolvency Act 1986. The court may order the asset returned or require payment of its value.
Personal contribution orders
Where misconduct is proven, the court can require directors to contribute personally to the company’s assets under provisions such as:
s.212 IA 1986 (misfeasance)
s.214 IA 1986 (wrongful trading)
s.213 IA 1986 (civil fraudulent trading)
Director disqualification
Under s.6 Company Directors Disqualification Act 1986, directors whose conduct makes them unfit may be banned from acting as a director for 2 to 15 years.
Criminal liability in serious cases
Where dishonesty is involved, criminal offences may arise, including:
fraudulent trading under the Companies Act 2006
offences related to misconduct during winding up under the Insolvency Act
Connected parties and look-back periods explained
A connected person includes directors, shadow directors and their associates.
Associates can include:
spouses and relatives
business partners
companies under the same control
Transactions involving connected persons face stricter scrutiny.
Transaction type
Connected look-back
Unconnected look-back
Transaction at undervalue (s.238)
2 years
2 years
Preference (s.239)
2 years
6 months
Defrauding creditors (s.423)
No statutory limit
No statutory limit
Transactions with connected parties may also trigger statutory presumptions, shifting the burden of proof onto the director.
Special scenarios across the UK and dissolved companies
Transferring assets elsewhere in the UK or dissolving the company does not necessarily prevent investigation.
Scotland and Northern Ireland variations
Scottish law includes the concepts of:
gratuitous alienation (s.242 IA 1986)
unfair preference (s.243 IA 1986)
Key differences include:
Scotland allows a five-year look-back for certain transactions involving associates.
Northern Ireland broadly mirrors the English rules but operates under separate legislation.
Dissolved companies and the 2021 Act
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 allows the Insolvency Service to investigate directors of companies that were dissolved without entering insolvency.
However, disqualification proceedings generally must be started within three years of the company’s dissolution, unless the court permits otherwise.
Safe alternatives to risky transfers
Moving assets quickly can increase personal risk. Safer options include:
7-point safety checklist
Obtain an independent valuation before any sale
Seek professional insolvency advice early
Consider administration or a restructuring process
Explore a Company Voluntary Arrangement (CVA)
Discuss Time to Pay arrangements with HMRC
Sell assets transparently on the open market
Document board decisions carefully
Quick comparison
Risky move
Safer route
Gift vehicle to spouse
Market sale supported by valuation
Repay director loan first
Negotiate structured repayment plan
Move IP to new company
Seek restructuring advice
Grant last-minute security
Formal refinancing process
Common misconceptions corrected
“It’s safe after six months”
Preferences to connected parties can be challenged for two years, not six months. Transactions intended to defraud creditors have no statutory time limit.
“Market value deals are always safe”
Transactions at full value are less likely to be challenged, but surrounding circumstances may still be investigated.
“Liquidators only look at big assets”
Even smaller transfers such as loan repayments or equipment sales may be investigated.
“I can reuse the company name”
Section 216 IA 1986 restricts reuse of a company name after liquidation for five years, although certain statutory exceptions exist.
“Transfers cannot be traced”
Office-holders have wide powers to obtain records from banks, accountants and other third parties.
Already moved an asset? Urgent steps to limit damage
If a questionable transfer has already happened, act quickly.
1) Gather documentation
Collect contracts, invoices, valuations and board minutes relating to the transaction.
2) Seek professional advice
A licensed insolvency practitioner can assess whether the transaction may be challenged.
3) Consider reversing the transaction
Voluntarily correcting a transaction may reduce potential disputes later.
4) Prepare for disclosure
Future office-holders can require directors to provide detailed financial information.
Never destroy records. Failure to cooperate with insolvency investigations can itself lead to serious consequences.
FAQs
1) Can I repay my director’s loan before the company goes bust?
Possibly, but it may be challenged as a preference under s.239 IA 1986 if it puts you in a better position than other creditors.
2) Does paying a key supplier count as a preference?
It may do if the payment places that creditor in a better position than others when insolvency is imminent.
3) Are transfers within a group treated differently?
Yes. Companies under common control are often treated as connected parties, meaning transactions may face stricter scrutiny.
4) How far back can a transaction be challenged?
Typical look-back periods include:
unlimited period for defrauding creditors (s.423)
2 years for connected party preferences
6 months for unconnected preferences
2 years for transactions at undervalue
5) Will a third-party buyer lose the asset?
If the buyer purchased in good faith and for value, the court may protect their interest, though the company or director may still face financial consequences.
6) Are personal assets at risk?
Directors can be ordered to contribute personally to company assets if misconduct is proven.
7) Do Bounce Back Loan misuse rules change the look-back period?
No special statutory look-back period was introduced. Existing insolvency and disqualification provisions apply.
8) Can I avoid disqualification by resigning?
No. Investigations focus on conduct during the period leading up to insolvency, regardless of whether the person is still a director.
9) What evidence proves market value?
Independent professional valuations and documented board decisions are the strongest evidence.
10) Does the six-month rule apply in Scotland?
Not always. Scottish law allows longer challenge periods in certain cases, particularly where associates are involved.
11) Is HMRC more aggressive than other creditors?
HMRC is often a major creditor and may provide information to insolvency practitioners, but the legal powers to challenge transactions lie with the administrator or liquidator.
12) Can insurance cover wrongful trading or misfeasance claims?
Insurance policies vary, and coverage for insolvency-related claims is often limited. Directors should not rely on insurance as a substitute for proper conduct.
Your next step toward a safe resolution
Arrange a confidential discussion with a licensed insolvency practitioner if you are considering any significant asset transfer while the company is under financial pressure.
Early advice can help protect company assets, minimise personal risk and ensure directors comply with their legal duties.
