When a company enters an insolvency process, every decision directors made that led to that point is closely scrutinised, especially those involving the transfer or sale of assets.
Under UK insolvency law, one area that often causes confusion is transactions at an undervalue. Put simply, this is when a company gives away assets or sells them for significantly less than they’re worth. While that might not sound serious, if it happens when the company is insolvent (or close to it), the consequences can be severe.
This guide explains what counts as an undervalue transaction under section 238 of the Insolvency Act 1986, how it’s applied in real life, and what directors can do to stay on the right side of the law.
What the law says
Section 238 of the Insolvency Act gives the court power to reverse (“set aside”) any transaction at an undervalue made by a company before it went into insolvency.
It applies where:
- The company made a gift, or
- The company entered into a transaction where it received significantly less than the market value in return.
For example, if a company sold equipment worth £50,000 for £5,000, or transferred ownership of a van to a director for nothing, that could be a transaction at an undervalue.
The key test is whether the company received reasonable value in exchange. If not, and the deal took place in the years leading up to insolvency, it could be unwound by a liquidator or administrator.
The time limits
Not every low-value deal is automatically a problem. The law sets a time window for how far back an insolvency practitioner can look:
- Two years before the start of insolvency if the transaction involved a connected person (such as a director, shareholder or family member).
- Six months before insolvency if the transaction involved an unconnected third party.
If the company was solvent at the time and stayed solvent afterwards, the transaction can’t usually be challenged. But if insolvency followed, the transaction may come under review.
The role of the insolvency practitioner
Once a company enters liquidation or administration, the licensed insolvency practitioner must review recent transactions as part of their statutory duties.
Their job is to protect creditors’ interests and identify anything that might have unfairly reduced the company’s assets before insolvency. If they find a transaction that looks suspicious, they can apply to court to have it reversed.
The court can order the recipient to:
- Return the asset to the company, or
- Repay the difference in value.
In practice, this means directors could be asked to reimburse the company personally if they were involved in, or benefited from, an undervalue transaction.
Common examples of transactions at an undervalue
If the court finds that a transaction was made to defraud creditors, it can make a restoration order to Some situations where undervalue transactions are often identified include:
- Selling company assets cheaply to friends, family or another business you control.
- Transferring property or vehicles to your personal name when the company is struggling.
- Waiving debts owed to the company without receiving anything in return.
- Paying for non-business expenses (like personal holidays or gifts) from the company account.
These can all reduce the pool of assets available to repay creditors and are therefore closely examined during liquidation.
What about selling a failing business?
It’s common for directors to want to sell their business, or parts of it, before things collapse entirely. Selling an insolvent business is legal, but only if it’s handled correctly through a licensed insolvency practitioner.
A fair, professionally-valued sale can protect directors from accusations of undervalue. But selling assets “on the cheap” or to a new company you also control without an independent valuation could be challenged later.
The safe route is to let an insolvency practitioner oversee the transaction, ensuring the sale price reflects fair market value and creditors aren’t disadvantaged.
What happens if you’re found to have made an undervalue transaction?
If the court decides a transaction at an undervalue took place, it can:
- Reverse the transaction, restoring the asset or its value to the company’s estate.
- Order repayment of money or property to compensate creditors.
- Investigate director conduct, which can lead to director’s disqualification or being held personally liable for company debts.
In serious cases, undervalue transactions can also overlap with wrongful or fraudulent trading, particularly where intent to avoid creditor claims is found.
How to stay compliant as a director
If your company is under financial strain, it’s vital to act responsibly. Courts recognise that genuine business decisions sometimes go wrong. What matters is whether your actions were reasonable and transparent at the time.
Here’s how to protect yourself:
- Get independent valuations before selling or transferring assets.
- Document every decision, including why a transaction was made and how you determined the price.
- Avoid transfers to connected parties unless they’re clearly for fair market value.
- Seek professional advice early — a licensed insolvency practitioner can confirm whether a proposed transaction could later be challenged.
- Put creditors’ interests first once insolvency is likely. Continuing to act as if everything’s normal risks breaching your duties.
The difference between preference and undervalue
Another related concept in insolvency law is preference: where a company unfairly favours one creditor over others. For example, repaying a family loan while ignoring HMRC.
While both undervalue and preference transactions can be challenged, they’re not the same:
- Transactions at an undervalue: The company gave away assets or sold them too cheaply.
- Preferences: The company treated one creditor more favourably than others.
Both reduce what’s left for the general body of creditors, and both can lead to director scrutiny if insolvency follows.
Why acting early matters
Most undervalue cases happen because directors try to “save what they can” when the business is struggling. It’s understandable. But without professional advice, those efforts can backfire.
If you’re facing pressure from creditors or considering selling assets, it’s always safer to get an independent insolvency assessment first. A licensed insolvency practitioner can confirm whether your company is insolvent, explain your legal duties and help structure any sale or closure correctly.
That way, you’ll avoid the risk of accusations later and demonstrate that you acted responsibly and in good faith.
Key takeaways: transactions at an undervalue
- A transaction at an undervalue happens when assets are sold or given away for less than fair market value.
- The rule is designed to protect creditors when a company becomes insolvent.
- The look-back period is two years for connected parties, six months for others.
- Insolvency practitioners can ask the court to reverse undervalue transactions.
- Directors who act reasonably, keep records and seek advice early are less likely to face personal penalties.
Get advice on transactions at an undervalue
If you think your company may have entered into a transaction that could be questioned — or you’re planning to sell assets while under creditor pressure — speak to a licensed insolvency practitioner now.
We specialise in helping directors understand their legal duties under insolvency law and protect themselves from avoidable risk.
Our experts can review your company’s position, assess any transactions, and guide you through the safest next step — whether that’s restructuring, sale or liquidation.
Get free, confidential advice today and stay compliant while protecting your future.
