What Is a Transaction at an Undervalue?

When a director sells company assets – such as stock, equipment, or property – at a price below the accepted market value, it is considered a transaction at an undervalue.

This can have serious consequences for directors if the company enters into an insolvency procedure, as it can be viewed as an attempt to divert value away from the company’s creditors – a violation of an insolvent director’s duties.

So what is a transaction at an undervalue? What are the potential consequences? And how can you protect yourself?

How Are Transactions at an Undervalue Identified?

When a business enters into insolvency proceedings, the office-holder (such as the official receiver, liquidator, or administrator) will review the company’s previous transactions, dating back up to 2 years.

They’ll review the company’s accounts and asset register to establish whether any unusual or suspicious transactions have taken place. If they believe these actions have contributed to the decline of the company – or they were made in anticipation of the company’s closure – they’ll make further investigations into the director’s conduct.

Transactions at undervalue aren’t strictly defined; in one previous judgement, a 10% discount was not considered to be undervalued, whereas in another a 20% discount was deemed to be undervalued sale. Sales do not have to strictly meet market value, but it is best to err on the side of caution – especially if a company is approaching insolvency.

What Are some Examples of Transactions at an Undervalue?

As the name suggests, any sale that is less than market value can be considered a transaction at undervalue, making it very broad. Some examples include:

Gifting assets to a connected party (such as your friend or family member)
Selling assets at an undervalue for a quick return
Allowing a connected party to use the company’s intellectual property free of charge
Selling assets for nominal fee with the intention of repurchasing them later

While ‘transactions’ typically involve the exchange of funds, giving away assets for free will not serve as a loophole; gifted assets will still be considered undervalued transactions.

What Are the Potential Consequences for Company Directors?

Company directors may find themselves facing accusations of misfeasance, wrongful trading, or – in extreme cases – fraudulent trading. These charges carry a variety of potential penalties:

Disqualification from directorship for 2-15 years
Made personally liable for company debts
Receiving court fines
Imprisonment for up to 10 years

Penalties will depend upon the severity of the offence; imprisonment is only applicable in severe cases of deliberate fraud.

How to Protect Yourself

Directors should make sure all transactions are approved by the company’s board prior to the sale.

In cases where the value of an asset isn’t certain, you can get it valued to ensure it is being sold for a reasonable price. This will allow you to defend yourself against any future accusations.

You also need to make sure you hold onto the sale documentation, as these financial records could prove crucial later on down the line, helping to demonstrate your transparency in any investigation.

I Want to Buy Back My Assets but Can’t Afford Market Value

If you’re insolvent but are worried about losing your company’s assets, it’s important you resist the temptation to sell or give them to someone you know so you can buy them back later.

To protect yourself financially and legally, you should allow your company to go through the voluntary liquidation process without moving around your assets. If there are any assets you wish to keep, you can speak to the liquidator and offer to buy back the assets over time. This is known as deferred consideration.

When the liquidator agrees, you’ll be able to hold onto the asset while you pay it off. If you default on the payments, the liquidator may then seek to sell the asset to someone else.

Speak to an Expert Today

If you think your company is insolvent, you should get in touch with an insolvency practitioner right away.

Our expert team can help you protect your interests, whether that’s through the safe exit provided by a Creditors’ Voluntary Liquidation, or by keeping the business afloat via a Company Voluntary Arrangement or administration.

Get in touch to book a free consultation today.