When a company (or individual) is facing financial trouble, it can be tempting to move or sell assets to protect them. But if that’s done to keep them out of creditors’ reach, it can trigger serious consequences under UK insolvency law.
Section 423 of the Insolvency Act 1986 gives courts wide powers to reverse any transaction made to defraud creditors. It’s designed to stop people from putting assets beyond recovery just before insolvency, whether that’s a company selling assets below value or an individual transferring property to a relative.
Let’s look at what a transaction defrauding creditors actually is, how it’s proven and what it means for company directors and individuals.
What the law says
Under section 423, a transaction defrauding creditors occurs when:
- A person (which includes a company) enters into a transaction at an undervalue, and
- They do so with the purpose of putting assets beyond the reach of someone who has, or might later have, a claim against them.
That means the court doesn’t just look at whether the asset was sold cheaply. It looks at why it was done. If the intention was to prevent creditors recovering what they’re owed, it may be treated as a fraudulent transaction.
The law is broad. It can apply to:
- Companies in liquidation or administration
- Directors of insolvent businesses
- Individuals in personal insolvency, such as bankruptcy or IVAs
What counts as a ‘transaction’?
Section 423 covers almost any form of asset transfer, including:
- Selling assets for less than they’re worth
- Gifting money, shares or property to family or friends
- Moving business assets into a new company before liquidation
- Repaying someone selectively to keep them ‘safe’ from loss
- Transferring property to a spouse or partner during financial distress
Even if the transaction looks innocent, if the court finds it was intended to frustrate creditors, it can still be unwound.
How it’s different from a preference payment
While both rules deal with unfair treatment of creditors, preferences (section 239) and transactions defrauding creditors (section 423) are not the same.
A preference payment happens when a director pays or benefits one creditor over others before liquidation.
A transaction defrauding creditors, however, is about asset transfer or disposal with intent to stop creditors accessing value.
To prove a transaction defrauding creditors, the court must find out if:
- The transaction reduced the value of the company or estate (for example, assets given away or sold under value), and
- There was a purpose of defeating or hindering creditors.
Unlike with preferences, the liquidator or trustee doesn’t have to show insolvency at the time, just that the intent was to prejudice creditors.
What happens if it’s proven
If the court finds that a transaction was made to defraud creditors, it can make a restoration order to reverse the effects. This can include:
- Ordering the recipient to return assets or money to the insolvent estate
- Reinstating ownership of property to the company or individual’s estate
- Directing third parties to compensate for lost value
The court can make these orders against anyone involved, even if they weren’t the person who made the transfer. So, if a director transfers company assets to a family member, that family member can be required to hand them back, regardless of whether they knew the full situation.
How this affects company directors
If your company is struggling, it’s crucial to understand that asset transfers before liquidation are closely scrutinised by the liquidator and the Insolvency Service. Common red flags include:
- Selling stock, vehicles or equipment cheaply to related parties
- Moving trading activity or brand names into a new company before liquidation
- Repaying personal loans or transferring money to relatives
- Any transaction that benefits connected persons when other creditors are unpaid
Even if you believed you were acting sensibly at the time, the law judges intent by outcome. If creditors were disadvantaged, and the court believes that was deliberate, you could face personal liability, director’s disqualification or even criminal sanctions under related fraud provisions.
How this affects individuals
Although section 423 often comes up in corporate insolvency, it also applies to individuals.
If you transfer personal assets, for example your home, savings or vehicle, to someone else while knowing creditors are closing in, that transaction can be challenged.
Trustees in bankruptcy or IVA supervisors can use section 423 to recover assets on behalf of creditors, in the same way a liquidator can for a company.
This means even informal transfers between family members can be unwound if they were intended to keep assets out of a creditor’s hands.
How to protect yourself
If you’re facing financial pressure, here are some practical steps to avoid breaching section 423:
- Avoid transferring assets without fair value. Always document valuations and sale terms.
- Don’t move assets between related companies before speaking to an insolvency practitioner.
- Keep full records. Notes, valuations and board minutes can show good faith.
- Get early advice. A licensed insolvency practitioner can tell you what’s safe and what could be challenged later.
- Be transparent. Hiding transactions almost always worsens the outcome.
Key takeaways
- Section 423 targets transactions designed to put assets beyond creditors’ reach.
- It applies to both companies and individuals.
- The key test is intent — whether the transaction was made to defraud creditors.
- The court can reverse the transaction and order repayment or asset return.
- Directors and individuals should seek professional advice before moving assets when debts are mounting.
We’re here to help
If you’re worried that past transfers or payments could be seen as defrauding creditors, it’s best to act early. Our licensed insolvency practitioners can assess your situation confidentially, explain the risks, and guide you through the safest options for recovery or closure. Get in touch today for free, no-obligation advice.
