A transaction at an undervalue is a gift, or a deal in which the company receives significantly less than it gives. If the company later enters administration or insolvent liquidation, the administrator or liquidator can ask the court to reverse it under section 238 of the Insolvency Act 1986, provided it took place in the two years ending with the onset of insolvency and the company was, or became, unable to pay its debts. Sales of company assets to directors and their families at a discount are the most common target.

What counts as a transaction at an undervalue?

Section 238(4) gives two limbs. The company enters into a transaction at an undervalue if it makes a gift or enters into a transaction on terms that provide for it to receive no consideration, or if it enters into a transaction for a consideration whose value, in money or money’s worth, is significantly less than the value of the consideration the company provides.

The test compares what went out with what came in. Selling a van worth £20,000 for £5,000, transferring stock to a new company for nothing, assigning a valuable lease for a nominal sum, writing off a debt owed by a friendly customer, or granting security for no benefit to the company can all fall within it. Only a significant shortfall counts, so a sale at a fair price that later turns out to have been slightly low is unlikely to be caught. That is why an independent valuation at the time is the best evidence a director can have.

The rule covers England and Wales and applies whenever a company enters administration or goes into liquidation. The claim belongs to the office holder, meaning the administrator or the liquidator, and any recovery goes into the pool for creditors. Scotland has a separate regime for gratuitous alienations in section 242, covered below.

How far back can a liquidator or administrator look?

Section 240(1) limits challenges to transactions made at a “relevant time”. For a transaction at an undervalue the period is two years ending with the onset of insolvency, whoever the other party is. This is wider than the rule for preferences, where the period is only six months unless the recipient is connected. Transactions made between an administration application and the order, or between filing a notice of intention to appoint an administrator and the appointment, are also caught.

Section 240(3) fixes the onset of insolvency for each route:

  • administration by court order: the date the application was made
  • administration following a notice of intention to appoint: the date the notice was filed
  • any other administration appointment: the date it took effect
  • liquidation straight after administration: the date the company entered administration (or the earlier application or notice date)
  • any other liquidation: the date the winding up commenced

Does the company have to have been insolvent at the time?

Yes. Under section 240(2) the transaction is only at a relevant time if, when it was made, the company was unable to pay its debts within the meaning of section 123, or became unable to pay them as a result. Section 123 covers both the cash flow test (unable to pay debts as they fall due) and the balance sheet test (assets worth less than liabilities, taking account of contingent and prospective liabilities). Our page on insolvency tests explains both.

For transactions with a connected person, insolvency at the time is presumed unless the contrary is shown. Section 249 treats a person as connected with a company if they are a director or shadow director, an associate of a director or shadow director, or an associate of the company. In practice that captures spouses, close relatives and companies controlled by the same people, so a director who sells an asset to a family member or to their new company starts with the burden of proving the old company was solvent.

Is there a defence?

Section 238(5) stops the court making an order if it is satisfied that the company entered into the transaction in good faith and for the purpose of carrying on its business, and that at the time there were reasonable grounds for believing it would benefit the company. All the elements must be met. A genuine clearance sale of slow moving stock to raise cash might qualify. A transfer of the company car to the director’s spouse a month before the creditors’ meeting will not.

People further down the chain get some protection. Under section 241(2) an order must not prejudice an interest in property acquired from someone other than the company in good faith and for value, and must not require a person who received a benefit in good faith and for value to pay unless they were a party to the transaction. Section 241(2A) presumes a lack of good faith where the person knew of the surrounding circumstances and the insolvency proceedings, or was connected with or an associate of the company or the counterparty.

What can the court order?

Section 238(3) directs the court to make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into the transaction. Section 241(1) lists examples. The court can:

  • require property transferred, or property representing its sale proceeds, to be vested back in the company
  • release or discharge any security given by the company
  • require any person to pay sums to the office holder for benefits received from the company
  • revive the obligations of a surety or guarantor released under the transaction
  • decide how far the person ordered to repay can prove in the winding up for debts arising from the transaction

In practice many claims settle once the liquidator writes setting out the shortfall, and the recipient pays the difference between the price paid and the value at the time.

What if the transfer was more than two years before the insolvency?

Section 423 deals with transactions defrauding creditors. It uses a similar definition of undervalue but has no two year window and does not require the company to be in formal insolvency. Instead, the court must be satisfied that the transaction was entered into for the purpose of putting assets beyond the reach of a person who is making, or may make, a claim, or otherwise prejudicing that person’s interests.

Under section 424, where the company is being wound up or is in administration the application is made by the liquidator or administrator, or by a victim with the court’s permission. In other cases a victim can apply directly. Section 425 gives the court powers similar to section 241, but a third party who acquired an interest in good faith, for value and without notice of the relevant circumstances is protected.

In Scotland, section 242 allows a liquidator, an administrator or a qualifying creditor to challenge a gratuitous alienation made in the five years before liquidation or administration where the recipient is an associate, or two years for anyone else. The person defending it can show that the company’s assets exceeded its liabilities after the alienation, that adequate consideration was given, or that it was a conventional or reasonable charitable gift.

How might this look for a small company?

Illustration only. A building contractor is struggling with unpaid HMRC liabilities. Eighteen months before it enters creditors’ voluntary liquidation, the director transfers the company’s newest van, worth about £20,000, to his partner for £5,000. The liquidator finds the sale in the bank statements and fixed asset register.

  • The sale is within two years of the winding up commencing.
  • The partner is an associate of the director, so the company’s insolvency at the time is presumed.
  • The consideration of £5,000 is significantly less than the £20,000 value.
  • The director cannot show the sale was for the purpose of carrying on the business with reasonable grounds to believe it would benefit the company.

The liquidator can seek an order that the van is returned or that the partner pays the £15,000 difference. The same facts may also support a claim against the director for breach of duty under section 212. Selling assets cheaply to a director can also have tax effects, which our page on company assets sold to directors covers.

What mistakes do directors make?

  • No valuation. Selling vehicles, equipment or stock to a connected buyer without an independent valuation leaves no evidence to rebut a later claim.
  • Confusing undervalue with preference. Paying a creditor in full is not a transaction at an undervalue, but it may be a preference under section 239, with its own time limits.
  • Moving the business before a pre pack or liquidation. Transferring goodwill, contracts or a trading name to a new company for little or nothing before an insolvency practitioner is involved invites a claim. A properly marketed sale by an office holder, explained in our guide to pre pack administration, is the safer route.
  • Assuming group transfers are safe. Moving assets to a sister company below value can be challenged on insolvency and can also be an unlawful distribution, as explained in intra group transfers at undervalue.
  • Ignoring the wider picture. An undervalue sale while the company is insolvent is also evidence that a director failed to consider creditors’ interests, which can feed into wrongful trading and disqualification proceedings.

Directors considering an asset sale while the company is under financial pressure should take advice from a licensed insolvency practitioner before signing anything, keep the valuation, and make sure the price is actually paid into the company’s account.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.