Transaction at an Undervalue: Can a Liquidator Challenge Payments or Asset Transfers Made Before Insolvency?

If a liquidator or administrator is questioning a payment you made or received, or an asset that changed hands before a company became insolvent, you may be worried that the court could reverse it as a preference or a transaction at an undervalue, or that you could be personally exposed. These claims can arrive months or even years after the event, often when you thought the matter was closed.

The good news is that not every transaction below market value, and not every payment to a creditor, can be challenged. Whether a claim succeeds depends on specific statutory tests, the company’s financial position at the time, and the documentary evidence. Early, strategic advice can make a significant difference to the outcome.

If you are concerned that a payment or asset transfer could be contested, or that you might be personally at risk, this article is for you. This article provides general information, not legal advice.

Preference or Transaction at an Undervalue? An Overview of the Law

The principal statutory provisions are contained in the Insolvency Act 1986: transactions at an undervalue (section 238) and preferences (section 239), with sections 240 and 241 dealing with the relevant time periods and the orders the court can make. These provisions allow liquidators and administrators to apply to the court to challenge (or “claw back”) certain transactions entered into during specified periods before the onset of insolvency (broadly, the date of the insolvency event from which the clawback periods are measured), provided the statutory conditions are met.

These powers are intended to protect the interests of creditors as a whole by preventing a company’s assets from being improperly diminished or particular creditors from being unfairly favoured shortly before insolvency. The legislation operates alongside other insolvency remedies, such as claims relating to directors’ duties, wrongful trading, and misfeasance, although those are separate causes of action with different legal tests. (See also our pages on Directors’ Duties, Wrongful Trading, Director Disqualification, and Company Insolvency.)

What is a Transaction at an Undervalue?

Under section 238 of the Insolvency Act 1986, a company may enter into a transaction at an undervalue where it:

• gives away assets for no consideration; or
• receives consideration that is significantly less than the value it provides.

Whether a transaction falls within the legislation depends on the specific circumstances. The court will consider matters such as the value exchanged and the company’s financial position at the time. Where the transaction involves a connected person, additional statutory provisions may also apply.

Examples that may attract scrutiny include:

• transferring business assets to shareholders or directors for substantially less than market value;
• gifting company assets;
• selling property at a substantial discount to its market value; or
• providing guarantees where the company receives little or no commercial benefit.

Not every sale below market value will necessarily be challenged. Distressed businesses may have legitimate commercial reasons for accepting less than full value, and the legislation contains important qualifications. Where transactions involve connected persons, the Insolvency Act 1986 contains certain statutory provisions that may affect how insolvency is assessed. These provisions can be technically complex and should be considered on a case-by-case basis.

What Is a Preference?

A preference, governed by section 239 of the Insolvency Act 1986, is different from a transaction at an undervalue. Broadly, it concerns payments or transfers that place a particular creditor, surety, or guarantor in a better position than they would otherwise have been if the company later entered insolvent liquidation. Where the preferred party was connected with the company, otherwise than by reason only of being an employee, section 239(6) presumes that the company was influenced by a desire to prefer, which shifts the evidential burden onto that person.

For example, questions may arise about a financially distressed company repaying one creditor in priority to others or granting additional security shortly before insolvency. However, whether a transaction amounts to a preference depends on whether the statutory conditions in section 239 are satisfied. This includes, in most cases, whether the company was influenced by a desire to prefer that creditor. A preference claim will also generally require the company to have been insolvent at the time of the transaction, or to have become insolvent as a result of it. The legal test is fact-sensitive and depends on the evidence available.

Worked Examples: A Preference and a Transaction at an Undervalue

Illustrative example: A director repaid a £120,000 loan they had personally made to their company six weeks before it entered liquidation, while trade creditors went unpaid. The liquidator alleged a preference. Contemporaneous board minutes and correspondence were central to whether the company was influenced by a desire to prefer the director, and to shaping the eventual negotiated outcome. As the director was connected with the company, the two-year look-back applied rather than six months, and the desire to prefer was presumed under section 239(6), so it fell to the director to rebut it.

Illustrative example: A company sold a commercial vehicle fleet to a connected company for well below market value shortly before administration. The administrator challenged the sale as a transaction at an undervalue. An independent retrospective valuation and evidence of the commercial rationale were decisive in determining the level of any restoration ordered. As the buyer was a connected company, insolvency at the relevant time was presumed under section 240(2), which left the commercial rationale and the section 238(5) defence (dealing in good faith) as the live issues.

Relevant Time Periods

The Insolvency Act 1986 specifies different periods during which transactions may be reviewed.

For transactions at an undervalue, the relevant period is generally up to two years before the onset of insolvency. For preferences, the relevant period is generally:

• up to six months before insolvency for unconnected parties; and
• up to two years where the preferred person is connected with the company (excluding those who are connected solely by virtue of being an employee).

As noted above, section 240(2) also requires that the company was unable to pay its debts within the meaning of section 123 at the time of the transaction, or became unable to do so as a consequence of it. That requirement is presumed where a transaction at an undervalue was entered into with a connected person, but it is not presumed for preferences.

When Does the Look-Back Period Start?

The look-back periods are measured backwards from the “onset of insolvency”, which is defined in section 240(3) and is frequently not the date people assume:

• for a company in administration, the date the administration application was made, the date the notice of intention to appoint was filed, or the date of appointment, depending on the route used;
• for a company that went into liquidation immediately following administration, that same administration date rather than the date of the liquidation; and
• for a company wound up by the court, the date the winding-up petition was presented – not the date of the winding-up order.

This distinction matters. A payment that looks comfortably outside the six-month window when measured from the winding-up order may fall inside it when measured from the petition date, and petitions are often presented months earlier. Establishing the correct onset date should be one of the first things checked on receipt of a claim.

Separately from the look-back periods, ordinary limitation rules govern how long an office-holder has to bring the claim once appointed. The position for sections 238 and 239 is not straightforward and has been the subject of conflicting decisions, so where a claim concerns an older transaction, it is worth taking advice specifically on limitation as well as on the merits.

Transactions Defrauding Creditors: Section 423

Section 423 of the Insolvency Act 1986 sits outside the periods described above and is often overlooked. It applies to a transaction at an undervalue entered into for the purpose of putting assets beyond the reach of a creditor, or of otherwise prejudicing a creditor’s interests.

Two features make it significant. First, there is no fixed look-back period, so a transaction well outside the two-year section 238 window can still be attacked, subject only to ordinary limitation rules. Second, the company need not have been insolvent at the time, and there need not be a liquidation or administration at all. A “victim” of the transaction can apply with the permission of the court, as well as an office-holder.

The trade-off for the applicant is that the prohibited purpose must be established, which is a materially higher evidential hurdle than section 238. In practice, section 423 tends to be deployed where the timing defeats a section 238 claim but the surrounding facts suggest asset protection was the real motive.

What Can the Court Do About a Transaction at an Undervalue or Preference?

Under section 241 of the Insolvency Act 1986, if the statutory requirements are met, the court has a wide discretion to make orders restoring the position, so far as reasonably practicable, to what it would have been had the transaction not occurred. Depending on the circumstances, this may include requiring the return of property, requiring payment to the insolvent estate, or varying security arrangements.

The court will consider all the relevant facts before deciding whether to grant relief. In relation to transactions at an undervalue, section 238(5) provides that the court shall not make an order where 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 the transaction would benefit the company. This is a bar on relief rather than a discretion, which is why it is usually the most important line of defence to a section 238 claim.

Section 241 also protects certain third parties. An order will not normally prejudice an interest in property acquired in good faith and for value from someone other than the company, and will not require a person who received a benefit in good faith and for value to pay a sum to the office-holder. The protection is narrower than it first appears, however: good faith is presumed to be absent where the recipient had notice both of the relevant surrounding circumstances and of the insolvency proceedings, or where the recipient was connected with, or an associate of, the company or the other party to the transaction.

What Should You Do Immediately?

If you are a director worried about historic transactions, or a creditor who has received a payment that may be challenged:

• Preserve all relevant records – board minutes, valuations, correspondence and accounts; delete nothing;
• Do not enter into further transactions with connected parties without advice;
• Locate any independent valuations or evidence of the commercial rationale for the transaction;
• Avoid making admissions or responding to a liquidator’s letter without advice;
• Take specialist advice promptly, ideally before responding.

Practical Steps for Directors

If a company is facing financial difficulties, directors should assume that significant payments and asset transfers may later be examined if the company enters liquidation or administration. Although every situation is different, prudent commercial practice often includes:

• keeping accurate financial records;
• documenting the reasons for significant commercial decisions;
• obtaining independent valuations where appropriate before disposing of valuable assets;
• treating creditors consistently where possible; and
• seeking professional advice before entering into unusual or substantial transactions.

These are matters of good governance rather than legal requirements in every case, but they can help demonstrate that decisions were made properly if later scrutinised. Creditors dealing with distressed businesses should also be aware that, in some circumstances, payments or transfers they receive could subsequently be challenged by an insolvency office-holder.

Why Instruct The Jonathan Lea Network?

We offer:

• Specialist commercial solicitors advising directors, creditors and insolvency practitioners nationwide;
• Commercial, pragmatic advice, not academic opinions;
• Fast response to urgent liquidator and administrator challenges;
• AI-assisted document analysis for faster review of large evidence bundles;
• Clear fee estimates before work starts, with fixed fee initial advice where appropriate;
• Trusted by directors and business owners across England and Wales, with excellent client reviews and a team bringing decades of combined legal experience advising directors and SMEs.

Who Do We Advise on Transaction at an Undervalue and Preference Claims?

We regularly act for:

• Company directors and former directors concerned about historic transactions;
• Creditors, suppliers and lenders who have received payments or security;
• Shareholders and connected parties;
• Insolvency practitioners, liquidators and administrators;
• Owner-managed and SME businesses approaching financial difficulty.

Frequently Asked Questions: Transaction at an Undervalue and Preference Claims

Contact Us

We will respond to most enquiries with an indicative scope and fee estimate and the offer of a complimentary 20-minute discovery video call before sending a more considered formal fee estimate via email.

In limited cases, we may offer a fixed-fee appointment, commonly charged at £750 plus VAT, including document review, a video consultation and an advisory email, as well as an estimate for further work.

Please email wewillhelp@jonathanlea.net or call 01444 708640. We will need an overview of the background and issues, together with significant documents, to provide an indicative scope and fee estimate.

VAT is charged at 20%.

This article is a general overview and is not legal or tax advice. The options available will depend on the LLP agreement and the particular facts of the matter.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.