Transactions defrauding creditors (section 423)

Q: How might this look in practice?

Illustration only. A small building company receives a letter of claim alleging defective work worth £300,000. Three weeks later the director transfers the company's van and equipment, worth £60,000, to a new company he owns for £5,000, and the old company stops trading. Four years later, after the claimant wins judgment and the old company goes into liquidation, the transfer is too old for some of the shorter look back periods, but section 423 still applies. The liquidator, or the claimant with the court's permission, could ask the court to order the new company to return the assets or pay their value. The evidence of the letter of claim and the timing would be central to showing purpose. The liquidator may also consider a misfeasance claim against the director. The Official Receiver's guidance notes that such a claim can be brought alongside a section 423 claim and can lead to an order against the director personally, although the loss can only be recovered once. See the creditor duty of directors.

Q: What mistakes do directors and advisers make?

Waiting out the clock. Section 423 has no look back period, so letting two years pass before liquidation does not make an undervalue transfer safe. Relying on advice as a shield. Following a professional's restructuring scheme does not prevent a court finding the necessary purpose. Assuming only existing creditors count. The section protects people who may at some time make a claim, so future claimants can be victims. Focusing only on the recipient. Orders can reach later holders of the property unless they bought in good faith, for value and without notice. Ignoring the wider picture. The same facts may support claims for fraudulent trading, misfeasance or director disqualification. 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.

Section 423 of the Insolvency Act 1986 lets a court reverse a gift or sale at an undervalue if it was made for the purpose of putting assets beyond the reach of someone who has, or may later have, a claim. Unlike most insolvency claw back rules, it has no look back period and does not need the company or person to be insolvent or in a formal insolvency procedure. The price of that reach is that the claimant has to prove the purpose behind the transaction.

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What does section 423 actually say?

Section 423 applies to transactions at an undervalue, which it defines in three ways: a gift or other transaction on terms that the transferor receives no consideration; a transaction in consideration of marriage or the formation of a civil partnership; and a transaction where the consideration received is, in money or money’s worth, significantly less than the value given. The section applies to individuals as well as companies.

The court may make an order only if it is satisfied that the transaction was entered into for the purpose of putting assets beyond the reach of a person who is making, or may at some time make, a claim against the transferor, or of otherwise prejudicing that person’s interests in relation to the claim (section 423(3)). If it is satisfied, it may make whatever order it thinks fit to restore the position to what it would have been if the transaction had not happened and to protect the victims. A victim is anyone who is, or is capable of being, prejudiced by the transaction (section 423(5)). legislation.gov.uk shows the section as extending to England and Wales.

How is it different from a transaction at an undervalue under section 238?

Section 238 deals with undervalue transactions by a company that later enters administration or liquidation. It only reaches transactions within the relevant time before the onset of insolvency, and only the administrator or liquidator can bring the claim. It does not ask why the company did the deal. The Official Receiver’s technical guidance sets out the main differences:

Point	Section 238	Section 423
Time limit on when the transaction happened	Yes, the relevant time before insolvency	None in the section
Formal insolvency needed	Yes, administration or liquidation	No
Transferor insolvent at the time	Relevant to the test	Not required
Who can apply	Office holder only	Office holder, supervisor or any victim
Purpose to be proved	No	Yes

Because the burden is lighter, the guidance tells official receivers to use the transaction at an undervalue route where the transaction falls within its time limits, and to turn to section 423 otherwise. For the shorter period rules, see transactions at an undervalue.

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Who can bring a claim?

Section 424 controls who may apply:

where the debtor is bankrupt, or is a company being wound up or in administration, the official receiver, trustee, liquidator or administrator may apply, and a victim may apply with the court’s permission;
where a victim is bound by a voluntary arrangement, the supervisor of the arrangement or any victim may apply;
in any other case, any victim may apply.

Every application is treated as made on behalf of every victim of the transaction (section 424(2)). The Official Receiver’s guidance notes that the court will usually achieve this by revesting the property in the transferor so that creditors can pursue it in the normal way, and that a claimant need not be the particular creditor the transferor had in mind.

What has to be proved about the purpose?

This is where most claims are won or lost. The Official Receiver’s guidance, drawing on decided cases, summarises the position:

the purpose must have been the actual intention of the person entering into the transaction; it is not enough that the transaction had the effect of defeating creditors;
it does not have to be fraud in any technical or criminal sense, despite the section’s title;
where there were several purposes, it is enough that putting assets beyond creditors was a substantial purpose;
a genuine wider aim, such as saving a business or a family home, does not stop the purpose being to defeat creditors;
acting on professional advice does not save the transaction;
intention can be inferred from timing and circumstances where there is no direct evidence.

For a company, the relevant purpose is that of the people who control it, typically the directors. A transfer made the week after a large claim was threatened, to a connected person, for little or nothing, is the kind of fact pattern from which a court may infer the purpose.

What can the court order?

Section 425 gives a non exhaustive menu. The court can order property, or the proceeds or money representing it, to be vested in any person; release or discharge security given by the debtor; require payment for benefits received; revive the obligations of a guarantor who was released; and secure any obligation it imposes. An order can bind people other than the original recipient. However, it cannot prejudice an interest acquired from someone other than the debtor in good faith, for value and without notice of the relevant circumstances, and cannot require a person who received a benefit in good faith, for value and without notice to pay anything unless they were party to the transaction (section 425(2)).

The guidance adds that the court may set aside the whole or part of a transaction, and has a discretion, rarely used, to decline an order where it would cause hardship.

Are there tax consequences if a transfer is reversed?

For inheritance tax, section 150 of the Inheritance Tax Act 1984 allows a chargeable transfer that has been set aside as voidable to be treated as if it never happened. HMRC’s Inheritance Tax Manual at IHTM14890 lists transactions set aside under sections 423 to 425 as one of the types of transfer affected. The claim must be in writing and made within four years after the claimant knew, or ought reasonably to have known, that the transfer had been set aside. Tax already paid on the transfer is repayable. Other taxes need to be looked at case by case.

How might this look in practice?

Illustration only. A small building company receives a letter of claim alleging defective work worth £300,000. Three weeks later the director transfers the company’s van and equipment, worth £60,000, to a new company he owns for £5,000, and the old company stops trading. Four years later, after the claimant wins judgment and the old company goes into liquidation, the transfer is too old for some of the shorter look back periods, but section 423 still applies. The liquidator, or the claimant with the court’s permission, could ask the court to order the new company to return the assets or pay their value. The evidence of the letter of claim and the timing would be central to showing purpose.

The liquidator may also consider a misfeasance claim against the director. The Official Receiver’s guidance notes that such a claim can be brought alongside a section 423 claim and can lead to an order against the director personally, although the loss can only be recovered once. See the creditor duty of directors.

What mistakes do directors and advisers make?

Waiting out the clock. Section 423 has no look back period, so letting two years pass before liquidation does not make an undervalue transfer safe.
Relying on advice as a shield. Following a professional’s restructuring scheme does not prevent a court finding the necessary purpose.
Assuming only existing creditors count. The section protects people who may at some time make a claim, so future claimants can be victims.
Focusing only on the recipient. Orders can reach later holders of the property unless they bought in good faith, for value and without notice.
Ignoring the wider picture. The same facts may support claims for fraudulent trading, misfeasance or director disqualification.

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.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.