Insolvency: transactions at an undervalue and preferences

If you are the director of a company which has gone into administration or liquidation by reason of insolvency, then you may find your actions in the preceding months and years coming under scrutiny from the appointed administrator or liquidator. This is particularly so where there is evidence to suggest that you may have contravened insolvency laws. For example, this could be by sanctioning a transaction designed to shield you, or someone you know, from the fallout of a corporate collapse and which was authorised at a time when you knew, or suspected, insolvency was highly likely.

Being accused of breaching insolvency laws is extremely serious and something that warrants taking immediate legal advice. If a liquidator or administrator succeeds in bringing a claim,  you and anyone else implicated in the wrongdoing could be ordered to hand back any property or money you are deemed to have unlawfully received.  You may also be required to make a personal contribution to company funds to make up for any prejudice that your actions may have caused to the company’s creditors.

There are a range of civil claims in insolvency which are commonly pursued by insolvency practitioners against directors, in particular.  These include claims arising from a transaction at an undervalue or giving a preference to a creditor, surety or guarantor. Michael Clinch, our resident insolvency expert, explains the circumstances in which these offences might be committed and what you can do as a director to defend yourself against an insolvency-related claim.

What is a transaction at an undervalue?

In corporate insolvency, a transaction at an undervalue is a transaction undertaken by the company on terms which are not favourable to the company and do not otherwise make good commercial or business sense. For example, this might include transferring company property to a creditor in settlement of an outstanding debt. Or transferring assets to directors, family or friends at a price which is unjustifiably low.

To successfully pursue you, the administrator or liquidator will need to be able to show that on your watch, and within the two years preceding the onset of insolvency, the company:

  • made a gift to someone, or otherwise entered into a transaction with them on terms which provided for the company to receive nothing of real value in return; or
  • entered into a transaction with someone on terms which provided for the company to receive some form of payment (in money or money’s worth), but the amount of that payment was worth significantly less than the value of what the company was providing.

However, it should be noted that an allegation of having been involved in a transaction at an undervalue is unlikely to hold up where you can show that the transaction was entered in good faith, for the purpose of carrying on the company’s business, and at a time when there were reasonable grounds for believing the transaction would actually be of benefit to the company.

What is a preference?

You might be accused of having given someone a preference where you have authorised something to be done, or allowed something to happen, which has had the effect of putting a person affected by the company’s collapse into a better position on insolvency than they would otherwise have been. This might be the case, for example, where you have arranged for an unsecured loan given to the company by a member of your family to be converted to a secured loan, or where you have elected to repay money loaned to the company by a friend or colleague in preference to settling other, more pressing debts.

To be able to successfully pursue you, the administrator or liquidator will have to be able to show that all of the following apply:

  • the person you are alleged to have given the preference to is one of the company’s creditors, or a surety or guarantor of one or more of the company’s debts or liabilities;
  • you have done something, or allowed something to happen, that had the effect of putting that person in a better position at the company’s insolvency than they would have been, had that action not happened or been authorised;
  • your decision to act in the way that you did was influenced by a desire to improve the position of the person in question in the event that insolvent liquidation occurred (with intention being presumed where the alleged preference has been given to a connected person, such as a fellow director or a member of your family);
  • the preference must have been given during the six months leading up to the company becoming insolvent (or in the preceding two years, if it involved a connected party); and
  • at the time of the transaction, the company must have already been unable to pay its debts or been forced into a position where this was the case as a result of the preference being given.

What sanctions could you face if the liquidator succeeds in a claim?

If an insolvency practitioner succeeds in proving that a transaction was a preference or a transaction at an undervalue, then you could be ordered by the Court to make good the loss to the company if the preference had not been given or the transaction at undervalue had not occurred.

This might involve you, or anyone else implicated in the deal, being directed to hand back any property you have unlawfully received; to make a cash payment to the administrator or liquidator for a sum equivalent to any benefit you are deemed to have derived; or to give security or a guarantee in respect of a debt or liability that you have previously tried to de-securitise.

You may also be made subject to a directors’ disqualification order, if the subject matter of the preference or transaction at undervalue results in your conduct as a director being reviewed by the Insolvency Service.  A disqualification will prevent you (for a stipulated period of time) from taking on another directorship role or being directly or indirectly involved in the promotion, formation or management of a company, or a limited liability partnership.

How we can help you to defend yourself

Very often, when an administrator or liquidator flags a pre-insolvency transaction as being of potential concern, it will be possible to address their misgivings by explaining the context in which decisions relating to the transaction were taken. For example, if agreeing to settle a particular debt on arguably dubious commercial terms was key to enabling the company to enter a refinancing arrangement aimed at helping it to survive, then it might be possible for a preference claim to be defeated as the clear intention in these circumstances would have been to benefit the company.

Being accused of breaching insolvency laws is extremely serious and something that warrants taking immediate legal advice.

Where you come to us for help at an early stage, we can advise whether a defence of your position may be possible and help you to collate any evidence which may be useful. This may include minutes from any meetings that were held to discuss the transaction and in which you and your fellow directors may have actively weighed-up the pros and cons.

Conversely, where a breach of insolvency laws has occurred, we can support you in negotiating with the administrator or liquidator to manage the steps that you might be required to take to make appropriate reparation and to reduce the risk of you being forced into bankruptcy where personal cash and assets are fairly thin on the ground.

We can also handle negotiations on your behalf where a directors’ disqualification order is proposed, with the aim of keeping the disqualification period as short as possible and ideally avoiding the need for an order to be made by giving a disqualification undertaking instead.

Contact us

To find out more, please contact Michael Clinch on 020 7845 7400 or at