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Transactions at an undervalue

When a company gets into financial difficulties and is heading towards insolvency, the duty of the directors shifts from a primary duty to the company, to a primary duty to the creditors of that company. During this time, directors and sometimes others face a risk of being held personally liable for certain actions (or lack of action) if the company then goes into insolvent liquidation or administration.

It is vital that directors are fully aware of their responsibilities and duties at times of insolvency, or on the cusp of insolvency, to avoid falling foul of these provisions. The personal financial consequences can be very severe if a person is found guilty.  

One issue that often arises in circumstances where the company is in difficulties is when a company director is accused of either giving away assets or transferring them outside of the company for less than their real value, known in insolvency legislation as a ‘transaction at an undervalue’, or TUV. Here, our director disqualification solicitors explore how this might happen, and ways to avoid this. 

What is a transactions at under value claim? 

A TUV claim can be brought when a company (which has subsequently gone into an insolvent liquidation or administration) gives a gift to another party or disposes of its property for no consideration, or the company enters into a transaction where the consideration is significantly less in value, in money or money's worth, than the true value. 

Who can take a transactions at under value claim? 

Either a liquidator or an administrator will usually bring a claim, but they can also assign a claim to a third party, such as a creditor. 

Who is at risk? 

A claim may be taken against anyone involved in the transaction, which can include the company and/or the person or entity that benefitted from the transaction. The directors of the company can be targeted, and this includes not only directors registered at companies house but also de facto directors (these are directors that may not be registered but act as directors), as well as shadow directors (someone with a significantly controlling interest in the decision making of the company). 

The recipient of the asset may be ordered to return the asset to the company. An order won’t be made against a third party who later acquired the property or assets from a person (not the company) in good faith for value to return the assets. 

What does it mean if the court finds there was a transaction at under value? 

The court has a wide discretion to make any order it thinks necessary to restore the company to the position it had been in had the transaction not occurred. For example, it might order that the property be transferred back to the company, or if that is not possible then it may order one or more directors to pay a compensatory amount back into the company.  

Any money ordered to be paid will go back to the company for the benefit of all creditors, not just the creditor that took the claim. 

What is required in order to bring a successful claim? 

A company (which has subsequently gone into an insolvent liquidation or administration) must have given a gift to another party or disposed of its property to another party for no consideration, or for consideration that was significantly lessthan its true value, in money or money's worth. 

What is considered to be a ‘transaction’, what is classed as ‘consideration’, and what is meant by ‘significantly less’ will depend on the circumstances, and there is no set definition of any of these terms, which are kept deliberately wide to cover many situations. 

The transaction must have taken place within two years of the appointment of an administrator, or the commencement of a winding up of the company, and at the time the transaction took place the company was either unable to pay its debts or became unable to pay its debts because of the transaction. 

If the transaction was entered into with a connected party, then it is presumed that the company was unable to pay its debts at the time of the transaction, so the respondent to a claim will actively need to prove the company was solvent at the time if the transaction was with a connected party. 

Who is considered to be a connected party? 

The definition in legislation is that a person will be connected to the company if they are a director or shadow director, or are an ‘associate’ of the company. 

The term ‘associate’ has a very wide definition and includes almost any link you can imagine to a director or the company, including all familial links (including extended family links and civil partners, former spouses, illegitimate children etc) and most business links. 

Defence to any claim 

Note that the court won’t make an order if it is satisfied: 

  1. that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and 
  2. that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company. 

This will very much depend on the circumstances of the transaction at the time, and this defence will usually lessen if the transaction was made to a connected person. 

What are the consequences for directors if they sell assets at an undervalue?

Directors’ disqualification 

A transaction at undervalue can be considered as misconduct for the purposes of directors’ disqualification proceedings. Depending on the level of wrongdoing, a director can be disqualified from being a company director for anywhere between 2 and 15 years. If you are in this position you should speak to a director disqualification solicitor, who will discuss with you a defence to disqualification proceedings.

Directors or individuals involved in transactions may face personal responsibility for the company's debt if the assets' actual worth cannot be recovered

A liquidator or administrator can bring a claim against the directors to recover the ‘undervalue’ and restore it to the company, so that this value can be used for the benefit of the company’s creditors. A claim might also be brought against the benefitting party if that is more likely to get a return for the company.

Financial penalties

While there is no financial penalty as such for a transaction at undervalue, if you are found to have made or allowed such a transaction, the liquidator or administrator will ask you for that money back. If they have had to take you to court to recoup this money, they will also ask for an order that you pay their legal costs of doing so.

What is the limitation period for a transaction at an undervalue?

The limitation if this is a claim for money is six years from the date of either the liquidation or administration. If property other than money is involved, there is an argument for a 12-year limitation, but this would be unusual.

How do administrators or liquidators identify a transaction at an undervalue?

When a company goes into liquidation or administration, the appointed administrator or liquidator is under a duty to investigate the company  and its directors, and will look at the books and records and accounts as part of this role. From this full investigation they will usually discover transactions that may not have been for the benefit of the company.

They also have very wide powers to gather in any information needed for their investigations, including powers to compel anyone with relevant information to cooperate in giving evidence and/or providing relevant documentation.

What types of transactions could be considered transactions at an undervalue?

There are many variations of this. The simplest example is if money is moved out of the company without any justification. Often this will be money going to a director, which isn’t justified as a declared dividend, or salary subject to tax.

Other examples might be if company assets are moved into the name of an associated company, or a new company, prior to insolvency. If no consideration is paid for this, or not sufficient consideration is paid, then this will be considered a transaction at undervalue and the associated company will be asked to pay for the asset. 

Sometimes directors will justify this by saying that this is a repayment of a loan from an associated company. While this might get around the ‘consideration’ point, it is likely this will be seen as a preference payment instead. 

What should I do as a director to avoid liability? 

If your company is facing financial difficulties, and particularly if creditors are going unpaid, it is important to keep on top of the accurate financial position of the company at all times, so that you have an accurate view of the finances and can assess what transactions might be considered to be inappropriate, and subject to later criticism. 

Hold regular board meetings in which decisions to dispose of assets are taken. Make sure all decisions and reasons behind them are carefully recorded in order to clearly explain the thinking behind decisions made at the time, and why they are beneficial to the company. 

If possible, obtain at least one independent valuation of any assets you intend to dispose of, to avoid allegations that such a disposal was at an undervalue. Document the valuation process in the books and records carefully. 

Take professional advice from an insolvency solicitor if you have any doubts and are concerned that you are undertaking a transaction that may later be attacked.


Prevention is better than cure, and if you are concerned about a proposed transaction as a director of a company in financial difficulties, then speak to one of our team to discuss this and get a steer.

Equally, if you find yourself subject to a claim by a liquidator or administrator, or on the end of the disqualification claim by the Insolvency Service, speak to us as soon as you are notified.  We will be able to advise on a defence, or negotiate a settlement for you.

About our expert

Eleanor Stephens

Eleanor Stephens

Senior Recovery & Insolvency Solicitor
Eleanor Stephens is a senior insolvency solicitor with over 20 years' specialist knowledge in all aspects of insolvency, both corporate and personal, covering contentious and non-contentious matters.

What next?

At Harper James we have a specialist insolvency team with many years’ experience advising companies and directors during times of financial hardship. If you think this may be relevant to your business, or if you are facing a claim by an insolvency practitioner, contact one of our team today to discuss your options.

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