What is a transaction at an undervalue?

2 August 2017


"What if we sell the company's assets to another company, then knock the insolvent company over?"

What is a transaction at an undervalue?

A transaction at an undervalue is referred to as s238 of The Insolvency Act 1986. Essentially, the company can be in breach of this section if assets are sold below their proper value while the company is in administration or liquidation. 


If the company is no longer viable and the directors believe that the company has no future, it may be tempting to "move" or sell some of the assets across to another trading company or partnership. The first warning is think carefully before doing that!

If the company has assets that actually belong to say a bank or Hire Purchase company, then these assets must not be sold or transferred without their explicit written approval.

However, if the assets are unencumbered and are then sold below their proper value, or moved for no payment (consideration), then there is a possible breach of s238 Insolvency Act 1986 - Transaction at an Undervalue.

This section applies in the case of a company where -

(a) the company enters administration or (b) the company goes into liquidation and "the office-holder" means the administrator or the liquidator, as the case may be.

Where the company has at a relevant time (typically 2 years if a connected party and 6 months if an unconnected party) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section, the court shall, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction. So the COURT can reverse that sales or movement of assets.

Secondly, this could lead to a negative report to DBiS and possible wrongful trading.

So how do we sell or move assets?

Properly! If there is a plan to sell any asset, then the safest policy is to get the asset(s) independently valued, make sure that the valuation has going concern and forced sale values. Typically you should use a RICS qualified valuer or surveyor to perform this task. Then we suggest that the assets is sold at or about forced sale values and the consideration banked to maximise the interests of the company's creditors.

Keep careful records of such transactions and it's probably best if a board meeting minutes the transactions as being formally approved by the board.

What if we cannot afford to buy the assets?

We suggest that you liquidate the company and then offer to buy the assets over time (deferred consideration) from the liquidator. DO NOT remove the assets thinking that there is no harm. Remember the directors may be made personally liable for the company debts if they have been wrongfully trading!

What if we hive across the assets or the business to another company?

This is a complex area of law that requires more details than a simple "what if" question, however the basic principles above apply. Hive across assets ONLY after proper legal advice and values have been established and a consideration paid by the other company.

See our guide to CVA plus Hive Down here.
Read an example of Transaction at an Undervalue in a High Court case

Summary:

It is vital that you take all reasonable steps to protect the assets of the business, to conform with the law and act in the best interests of the company's creditors. Remember if you have any doubts or questions about the above brief guide please contact us on 08009700539

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