A connected party sale happens when a company’s assets are sold to someone who has a close relationship with it, usually a director, shareholder or family member. These sales often take place when a business is insolvent and being sold through Administration or liquidation.
The idea is simple: a company that can’t survive in its current form might still have valuable parts worth saving, such as its brand, stock, website or customer base. Sometimes, the best buyer for those assets is the people who already know the business best: its directors.
However, because these buyers are ‘connected’ to the company, the law places strict rules and transparency requirements on the process. That’s to ensure the sale genuinely benefits creditors and isn’t just an attempt to walk away from debt.
Who counts as a ‘connected party’?
Under UK insolvency law, a connected party includes:
- Current or former company directors
- Shadow directors (those acting as directors without being formally appointed)
- Shareholders who hold a significant stake in the company
- Close relatives of directors or shareholders
- Companies or businesses owned or controlled by the same people
Essentially, if there’s overlap in ownership, control or family connection, it’s classed as a connected party transaction.
This matters because connected parties have insider knowledge and influence that external buyers don’t. That creates the potential for unfair advantage, which is why sales to them are closely scrutinised.
Why connected party sales happen
When a business goes into Administration, the appointed insolvency practitioner (acting as the administrator) has one overriding duty: to achieve the best result for creditors as a whole.
In some cases, selling assets to an external buyer will bring in the highest price. But in others, especially where time is critical or the business has niche value, selling to connected parties can actually deliver the best outcome.
For example:
Preserving jobs – The directors may still have the trust of the employees, making them the best people to try again under a new company and re-employ staff.
Protecting goodwill – Existing management already understands the brand, customers and suppliers.
Avoiding disruption – Immediate sale (often through a pre-pack) can stop the business collapsing overnight.
When handled transparently and at fair market value, a connected party sale can be a legitimate rescue route rather than a way to escape debt.
How connected party sales work
Connected party sales typically happen in Administration or liquidation.
Administration
When a company enters Administration, an insolvency practitioner takes control and can sell the business or its assets to raise funds for creditors. If the buyer is connected to the company — say, the directors forming a new company to buy the assets — it’s known as a connected party pre-pack sale.
Since April 2021, such pre-pack sales must comply with The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021. These rules require independent scrutiny before any sale can go ahead. The connected party must either:
- Obtain an independent evaluator’s report, confirming the deal represents reasonable value, or
- Get creditor approval before completing the sale.
Without one of these steps, the administrator cannot legally sell the assets to a connected buyer.
Liquidation
In a Creditors’ Voluntary Liquidation (CVL), assets are usually sold off to repay debts. If directors or shareholders want to buy back those assets, the same principle applies: the sale must be at fair market value, fully documented and clearly in creditors’ best interests.
The liquidator will usually seek independent valuations and keep detailed records to prove the transaction was carried out appropriately.
The benefits of connected party sales
When done correctly, connected party sales can achieve genuine benefits for everyone involved:
Continuity for employees: The new business can take on staff and contracts, avoiding redundancies.
Better returns for creditors: Assets may sell faster and for more money when a ready buyer exists.
Reduced loss of value: A Pre-Pack Administration can complete within days, preventing customer and supplier collapse.
Business rescue: The viable parts of the business survive under new ownership, even if the old company closes.
For many small and medium-sized firms, this can mean the difference between a total shutdown and a realistic chance to rebuild.
Independent evaluation: how it protects creditors
If you’re a director buying assets from your own insolvent company, the independent evaluator’s report is key. The evaluator must:
- Be independent from both the buyer and the administrator
- Have relevant professional experience in business valuation or insolvency
- Review all proposed terms of the sale, including price, payment structure and justification
- State clearly whether they believe the sale represents reasonable consideration for the assets
While the administrator isn’t legally bound to follow the evaluator’s recommendation, they must explain in writing why they’ve chosen to proceed if the report raises concerns.
This process ensures that connected party sales aren’t simply ‘mates’ deals’ but properly tested, documented transactions.
What directors should know before buying back assets
If you’re considering buying assets from your insolvent company, you’ll need to:
- Work with the appointed insolvency practitioner to ensure full transparency
- Get an independent valuation or evaluator’s report early
- Pay fair market value and be prepared to evidence funding
- Keep transactions at arm’s length and separate elements like bank accounts, new contracts etc.
- Understand that your conduct before and during insolvency will still be reviewed
Even if the sale is approved, the liquidator or administrator must still submit a director’s conduct report to the Insolvency Service. Any signs of misconduct, transactions at an undervalue or preferential transactions could still lead to personal consequences.
Key takeaways on connected party sales
- A connected party sale happens when assets are sold to directors, shareholders or related parties.
- They’re common in Administration and liquidation but must follow strict legal safeguards.
- Independent evaluation protects creditors and ensures fair value.
- Directors can buy assets back, but only transparently and at market value.
- When managed properly, connected party sales can rescue viable parts of a business and protect jobs.
Get advice on a connected party sale
Connected party sales often divide opinion. But when you strip away the emotion, they’re simply one of several legal tools designed to preserve value in insolvency.
Handled responsibly, with open communication, independent oversight and fair value, they can protect jobs, suppliers and even creditors’ returns. Mishandled, they can destroy trust and trigger investigations.
If you’re a director considering buying back your business or its assets, speak to our insolvency experts early on. The process can work but it has to be done properly. That’s where we come in.
