The short answer
A transaction at undervalue is when an insolvent company gives an asset away, or sells it for significantly less than it is worth, before it formally fails — for example transferring a vehicle, property or stock to a director, relative or friend for a token sum. Under section 238 of the Insolvency Act 1986, a liquidator or administrator can ask the court to set the transaction aside if it happened within two years of insolvency and the company was insolvent at the time.
As a business runs out of road, it can be tempting to move valuable assets out of harm’s way — a van signed over to a relative, a property sold cheaply to a connected company, equipment gifted to a friend. The law anticipates exactly this. A transaction at undervalue can be reversed by the court, restoring the asset (or its value) to the company so all creditors share fairly. This guide explains the test, the look-back, and the defences.
Transactions at undervalue at a glance
- Governing law Section 238, Insolvency Act 1986
- What it is Asset sold or given away below value
- Look-back 2 years before insolvency
- Condition Company insolvent at the time
- Remedy Court can set the transaction aside
- Key defence Genuine business purpose, in good faith
What counts as an undervalue
A transaction is at an undervalue where the company either makes a gift (receives nothing), or receives consideration that is significantly less than the value of what it gave up. The comparison is between the value going out and the value coming in — so a property worth £200,000 sold for £120,000 to a connected buyer is a textbook example.
The conditions a liquidator must show
- The transaction was at an undervalue (gift or significant shortfall).
- It took place within two years before the onset of insolvency.
- The company was insolvent at the time, or became insolvent because of it — presumed where the other party is a connected person.
| Feature | Transaction at undervalue (s.238) | Preference (s.239) |
|---|---|---|
| Core idea | Asset leaves cheaply or free | One creditor paid ahead of others |
| Look-back | 2 years (all parties) | 2 years connected / 6 months others |
| Mental element | No desire test — value-based | Desire to prefer must be shown |
Unlike a preference payment, there is no “desire” test — an undervalue is judged on the numbers, which often makes it easier to establish.
The good-faith defence
A court will not set aside a transaction if the company entered into it in good faith for the purpose of carrying on its business, and there were reasonable grounds to believe it would benefit the company. Selling an asset at a properly valued, arm’s-length price to raise genuine working capital is defensible; gifting it to a relative as the company folds is not.
What happens if it is set aside
The court can make any order to restore the position the company would have been in. That usually means returning the asset, or paying the company the shortfall, so the value is shared among all creditors. The same facts can also feed a misfeasance claim and a report to the Insolvency Service on the director’s conduct. If you are unsure whether a past sale is at risk, take advice before acting further.
Concerned an asset sale could be reversed?
A licensed insolvency practitioner can value the transaction and test it against section 238 on your actual figures. A short, confidential call clarifies the risk.
Frequently asked questions
Is selling an asset cheaply always a problem?
No — a properly valued, arm’s-length sale to raise genuine working capital can be defended. The risk arises with gifts or sales well below market value, especially to connected people.
What is the difference from a preference?
An undervalue is about an asset leaving the company too cheaply; a preference is about one creditor being paid ahead of others. Undervalue has no ‘desire’ test.
How far back can a liquidator look?
Two years before the onset of insolvency for a transaction at undervalue, for both connected and unconnected parties.
Can I be made to give the asset back?
Yes — the court can order the asset returned or the shortfall repaid so all creditors share in the value.
Sources & further reading
- Insolvency Act 1986 — section 238 (transactions at undervalue)
- GOV.UK — Liquidate your limited company
- The Insolvency Service — guidance for company directors
- Company Directors Disqualification Act 1986 — unfit conduct
This guide is general information, not formal insolvency advice. Your situation must be assessed by a licensed insolvency practitioner before you act.