A transaction at undervalue is a sale, gift or other deal where a company gives away something worth much more than it received in return — and it is one a liquidator or administrator can ask a court to reverse, even after the company has closed. If your company sold an asset cheaply, wrote off a debt, or transferred property to a family member or associate before insolvency, section 238 of the Insolvency Act 1986 gives an office-holder the power to unwind that deal.
This matters to you personally, not just to the company. Directors who agreed to sell assets below market value — even with good intentions, and even to help the business survive — can be ordered to repay the shortfall, and in serious cases face disqualification. Understanding what counts as one, and how it differs from a preference, helps you see where the real risk sits.
What a transaction at undervalue is
Under section 238 of the Insolvency Act 1986, this happens when a company:
- makes a gift, or enters a deal for no payment at all;
- receives "significantly less" value than it gives, measured in money terms; or
- pays over the odds for something it receives, which has the same effect in reverse.
The test is whether the value given by the company was clearly less than the value it received. A modest discount on a sale is unlikely to count. A sale at a fraction of market value, or an outright gift, is the kind of deal that attracts scrutiny once a company becomes insolvent.
Common examples: cheap asset sales and gifts
In practice, most claims of this kind arise from ordinary-looking business decisions made under pressure. Typical examples include:
- selling company vehicles, stock or equipment to a director, family member or connected company well below market price;
- transferring the company's premises, goodwill or intellectual property to a new company for little or nothing;
- writing off a loan or debt owed to the company by a director or associate;
- gifting money, shares or property out of the business shortly before insolvency.
None of these need dishonest intent to be challenged. A liquidator only has to show the value exchanged was unequal and that the company was, or became, insolvent because of it (or was already insolvent at the time).
How it differs from a preference
Transactions at undervalue are often confused with preferences, but they are separate claims with separate tests. Under section 239 of the Insolvency Act 1986, a preference happens when a company pays or favours one creditor ahead of others — for example, repaying a director's loan in full while trade suppliers go unpaid — putting that creditor in a better position than they would have been in a liquidation.
A transaction at undervalue, by contrast, involves the company receiving too little value in the first place; no proper creditor relationship needs to exist at all. Our article on preference payments before liquidation covers the preference test in detail, including why timing and intention matter differently there.
The look-back periods and connected parties
A liquidator or administrator can only challenge transactions within a set look-back period, counted back from the date the company entered a formal insolvency process:
- Two years for transactions at undervalue generally, as set out in the "relevant time" rules under section 240 of the Insolvency Act 1986.
- Insolvency at the time (or caused by it) must usually be shown — unless the other party was a "connected person" (a director, shareholder, or close family member), in which case the company is presumed insolvent unless proven otherwise.
Connected-party transactions face closer scrutiny precisely because the presumption of insolvency shifts the burden onto the director to show otherwise. Deals with family members, associated companies, or fellow directors are the ones most likely to be investigated.
What a court can order to reverse it
Where a court finds a transaction at undervalue, it has wide powers under section 238 to restore the company to the position it would have been in if the deal had not happened. Orders can include:
- requiring the recipient to pay back the shortfall in value, or return the asset itself;
- unwinding related security or charges connected to the transaction;
- releasing or discharging obligations the company took on as part of the deal.
There is a statutory defence: a transaction won't be undone if the court is satisfied it was entered in good faith, for the purpose of carrying on the business, and there were reasonable grounds to believe it would benefit the company. This is a narrow defence and rarely covers deals with connected parties done as insolvency approached.
Personal exposure and disqualification risk
This kind of claim is usually brought against whoever received the benefit, but directors who approved or arranged the deal face their own risks. Alongside repayment orders, directors can face:
- a misfeasance claim for breach of duty in approving the transaction;
- director disqualification proceedings, if the conduct suggests unfitness to act as a director;
- personal liability that survives even though the company itself has been dissolved.
This sits alongside the wider question of when a director becomes personally liable for company debts, which we cover separately in Am I personally liable for company debts?
How to handle asset sales properly in distress
If your company is under financial pressure and you need to sell or transfer an asset, a few practical steps reduce the risk of a later challenge:
- Get an independent, written valuation before selling — especially to a connected party.
- Keep a paper record of why the sale happened and how the price was reached.
- Avoid selling to family, other directors or associated companies unless the price is demonstrably fair.
- Take advice before writing off director loans or debts owed to the company.
- If the company may be insolvent, speak to a regulated insolvency practitioner before, not after, the transaction.
Acting transparently, at fair value, and with proper records is the clearest way to show a transaction was reasonable if it is later reviewed.
Frequently asked questions
What if I sold at a fair price?
A sale at genuine market value is not a transaction at undervalue, regardless of who bought it. The test is the value exchanged, not who the buyer was. An independent valuation obtained at the time is the strongest evidence the price was fair.
Does moving assets to a new company count?
Yes. Transferring assets, contracts or goodwill to a new company for little or no payment — sometimes called a "phoenix" arrangement — is a common trigger for a transaction at undervalue claim, particularly where directors of both companies overlap.
How far back can a liquidator look?
Generally up to two years before the company entered administration or liquidation. Where the other party was connected to the company, insolvency is presumed within that period unless proven otherwise.
Can the claim be brought after the company has been dissolved?
Yes. A liquidator can apply to restore a dissolved company to the register specifically to pursue this type of claim, so closing the company does not remove the risk.
Does it matter if I didn't intend to harm creditors?
Intent isn't required for the claim itself, only for certain defences and for related claims like fraudulent trading. A transaction can be reversed even where a director genuinely believed it was in the company's best interests.
This article is general information, not legal, financial or insolvency advice. Every situation is different, and directors should speak to a regulated specialist about their own circumstances before acting.
If you'd like to talk it through, Harbourfirst can introduce you to a regulated insolvency specialist — start an enquiry.