What are transactions at an undervalue?

A transaction at an undervalue (referred to as s238 of The Insolvency Act 1986) is when business assets are sold lower than their true value or for a loss.

Should the company become insolvent, it can result in serious repercussions for company directors who may be viewed as deliberately diverting assets away from creditors.  This is because it may be viewed as deliberately diverting assets away from the company’s creditors (i.e. the companies/people it owes money to)

It is the duty of the appointed insolvency practitioner (IP) is to identify whether any transactions at undervalue have been carried out once the company enters Administration or liquidation.

Insolvency practitioners will go back two years or more from the date of the business entering insolvency in their search, Once insolvent IP’s have the right to apply to the court for the transaction(s) to be reversed

What is a transaction at undervalue?

A transaction at undervalue occurs when a business asset is transferred or sold to a third party, either for no payment at all, or for a price that is considerably lower than its true value.

Transactions at undervalue can include:

• Assets that are ‘gifted’ to someone connected to the business – perhaps a family member or another director – where no payment is made in return.
• Assets gifted/transferred to an independent third party, again with no consideration being received by the company.
• An asset that is sold for a vastly reduced sum – one that is considerably lower than its true market value.

How are transactions at undervalue identified by the IP?

The appointed insolvency practitioner analyses the company’s books, asset register, and other financial documentation, to identify whether any ambiguous or otherwise questionable transactions have taken place, they will be able to identify any ambiguous or questionable transactions. 

Further investigation will be necessary if transactions at an undervalue could have contributed to the company’s decline, or if they occurred once the company was insolvency.

To ensure directors do not inadvertently undertake transactions at an undervalue you should have the asset professionally valued to ensure that a fair price is achieved. Once the sale has been completed, the money should be deposited into the company bank account as soon as possible. Financial records should always be kept organised.

Can a undervalued transaction by challenged by a liquidator

Undervalued transactions are successfully challenged by Liquidators and administrators of insolvency companies, this is due to it being the person or legal entity providing the relevant consideration can often be found to be engaging in the transaction for purposes other than for the benefit of creditors. The purpose behind a transaction, particularly a successfully challenged one is that it can often have been done to avoid the creditors and in such an instance makes it much more susceptible to being challenged by a Liquidator.

If you enter into a transaction (which is considered to be at undervalue) and the motivating factor for your entering into the same is in respect of your personal benefit, either in respect of the company that you are in control of or in respect of your personal benefit (because it affects you as an individual) and when undertaking that transaction you are insolvent or you become insolvent as a consequence of entering into the transaction, then it is quite likely (albeit subject to the facts of the case) that the transaction, absent satisfactory consideration could be susceptible to challenge by a Liquidator or Insolvency Practitioner.

How to avoid selling/transferring assets at an undervalue

Directors need to make sure that a formal procedure is followed prior to the sale or transfer of assets in these circumstances. Best practice would be to hold a board meeting, during which minutes are taken to document all agreed action in this respect.

This may provide some protection for individual directors, as it shows intent to gain full board approval for their decision.

The most important consideration is to hire the services of a RICS qualified surveyor or valuer, to ensure that forced sale and going concern values are provided. Once sold, preferably at forced sale value, the cash should be banked immediately and full records of the sale retained for several years after the statutory time requirement.

What if we cannot afford to buy the assets?

The assets rightly long to the limited company and not the director, if you cannot afford to buy the assets, you may offer to pay the liquidator of the business over time (deferred consideration) from the liquidator.

There are a number of finance options available to restart businesses that can assist with purchasing the assets from the liquidator or administrator.

Do not try to hide or remove assets for an insolvent company. Remember the directors may be made personally liable for the company debts if they have been wrongfully trading!

What are the penalties for undervalue transactions?

Any sale of assets undervalue will be considered a breach of the Insolvency Act 1986 and solicitors who deal with insolvency will be quick to warn that directors involved in activities like these could face financial penalties as well as the possibility of criminal prosecution.

Something to bear in mind is that directors can be held personally liable for some or all company debts and may be disqualified for up to 15 years if accused of wrongful or fraudulent trading in insolvency.

F.A.Q:

How to not be liable for transactions at an undervalue

The only way to ensure that you are not liable for transactions at an undervalue by selling or passing on assets at undervalue reduces is to appoint a RICS qualified surveyor or valuer. Creditor interests should always come first and in order to avoid accusations to the contrary, directors should follow a formal procedure for selling or transferring assets. You must start the process with a board meeting where all directors agree the action and the minutes of the meeting are recorded. The valuer will usually offer two valuations, they are, that of a going concern and forced sale values are provided. Once the assets have changed hands, the funds should be banked without delay with full records retained for several years following the statutory time requirement.

Worried about your legal position?

It is vital that you take all reasonable steps to protect the assets of the business, to conform with the law and act in the best interests of the company’s creditors. Should you be worried about your duties as a direct please complete the online enquiry for, or contact us on the above number.