Transfer at Undervalue in the UK: What Businesses Need to Know

If your business is moving assets around - selling equipment to raise cash, moving IP to a sister company, repaying a director, or tidying up your group structure - you’ll want to make sure the price and terms stack up.

Why? Because UK insolvency law allows certain “transactions at undervalue” to be unwound if they happened before insolvency and for less than proper value. That can create headaches for sellers, buyers and directors alike.

In this guide, we explain what a transfer at undervalue is, when it can be challenged, the risks for SMEs, and how to structure transactions safely so you’re protected from day one.

What Is A Transfer At Undervalue Under UK Law?

A “transfer at undervalue” (often called a transaction at undervalue) is when a company gives away an asset for nothing, or for significantly less than the asset is worth. This is defined in the Insolvency Act 1986.

Common business scenarios include:

• Selling company equipment to a related party at a knock-down price.
• Assigning valuable IP to a group company for nominal consideration.
• Waiving a debt owed to the company without proper commercial reason.
• Granting security to an insider without receiving new value in return.

If your company later goes insolvent, a liquidator or administrator can ask the court to set aside that transaction and restore the position for creditors. The court’s powers are wide: it can reverse transfers, require compensation, vary security, and order recipients to pay sums back.

It’s important to distinguish this from a “preference” (paying or securing one creditor over others before insolvency). Preferences are a different concept with their own rules - but in practice, both can come up in the same set of pre-insolvency dealings.

When Can Transactions At Undervalue Be Challenged?

The Insolvency Act 1986 includes several key tests and time limits that SMEs should keep in mind:

Look-Back Periods

• Companies: Transactions at undervalue can generally be challenged if they occurred within the 2 years before the “onset of insolvency”.
• Connections matter: Dealings with “connected persons” (e.g. directors, shareholders, group companies or family) are scrutinised more closely and certain presumptions can apply.
• Individuals: Sole traders facing bankruptcy have a longer look-back (up to 5 years) under separate provisions.

Financial Position At The Time

The company must have been insolvent at the time of the transaction, or become insolvent as a result of it. Insolvency here usually means either cash-flow insolvency (unable to pay debts as they fall due) or balance-sheet insolvency (liabilities exceed assets).

Defences And Commercial Justification

Court orders are not automatic. There’s a vital defence where a company enters a transaction in good faith for the purpose of carrying on its business, and there were reasonable grounds at the time to believe it would benefit the company. In other words, if you can show a genuine commercial rationale and proper value (or equivalent benefit), you’re in a much stronger position.

That’s why getting proper valuations, documenting your reasoning, and recording decisions in board resolutions is so important.

Why Transfers At Undervalue Are A Big Deal For SMEs

For small businesses, cash is tight and owners often wear multiple hats. That’s exactly when these risks crop up:

• Directors’ personal risk: Directors owe duties under the Companies Act 2006, including the duty to act in the company’s best interests, and when insolvency is likely, to consider creditors’ interests. Approving an undervalue deal can trigger claims, alongside wrongful or fraudulent trading exposure in serious cases.
• Cashflow “quick fixes” backfiring: Selling an asset too cheaply to raise cash now can be unwound later, creating liability for the company and recipients.
• Group reorganisations: Moving assets around group companies without proper consideration can be challenged, particularly where parties are connected. Understanding group structures and documenting intercompany terms is essential.
• Payments to insiders: Repaying or securing a director loan or shareholder debt ahead of other creditors can be attacked as a preference or undervalue.
• Buyers can be on the hook: If you buy an asset at a bargain from a distressed seller, expect enhanced scrutiny later - the asset (or value) can be clawed back.

The message is simple: make sure transactions are for proper value and commercially justified, especially where financial pressure is increasing or the counterparty is connected to your business.

Examples: What Counts As “Undervalue” (And What Doesn’t)?

Likely To Be Undervalue

• Selling a van worth £20,000 to a director’s relative for £4,000, without independent valuation or market exposure.
• Assigning your trade mark and customer database to a sister company for £1 “to tidy things up”, with no licence-back or service fee arrangement.
• Waiving a £50,000 intercompany receivable after sustained losses, without any tangible benefit to the company waiving it.

Less Likely To Be Undervalue (If Evidence Supports It)

• A properly marketed sale where you can show fair market value (multiple quotes, auction, or an independent valuation report).
• An intercompany IP move on arm’s length terms with a documented intercompany IP licence, transfer pricing rationale, and appropriate fee structure.
• A turnaround transaction undertaken in good faith that clearly benefits the company (e.g. a reasonable discount to secure a lifeline customer contract backed by robust forecasting).

Remember, it’s not just the price - courts look at the whole picture: process, advice taken, board minutes, financial forecasts, and what the company got back by way of benefit or consideration.

How To Reduce Risk: A Practical Checklist For Business Owners

Here’s a step-by-step approach you can apply before approving any transaction that might be questioned later.

1) Check Solvency And Creditor Impact

• Get up-to-date financials and cashflow forecasts.
• Ask whether the deal will make any creditor worse off, especially HMRC or critical suppliers.
• Where financial pressure is mounting, record that directors considered creditors’ interests and why the deal is still in the company’s best interests.

2) Get An Independent View Of Value

• Obtain multiple offers or an independent valuation for significant assets.
• For shares, consider a structured approach to valuation (our guide on valuing company shares covers the usual methods).
• Keep a file note explaining how you determined “market value” at the time.

3) Document Commercial Rationale

• Prepare a short paper setting out the business purpose: cost saving, refinancing, group simplification, customer retention, etc.
• Record the decision with clear board resolutions, noting the information considered and professional advice taken.

4) Use Proper Contracts

• For share or asset disposals, ensure a compliant share transfer or asset sale agreement with warranties, value, and completion mechanics.
• For group reorganisations, use formal agreements (e.g. licences, services agreements) at arm’s length rates to evidence consideration.
• If the transaction involves director benefits, ensure it aligns with your directors’ remuneration approvals and disclosure rules.

5) Beware Of Insider Deals And Distributions

• Transactions with directors, shareholders or group companies will be scrutinised. Treat them as you would a third-party deal - or more strictly.
• Ensure any dividends or buybacks follow the Companies Act “distributable profits” rules. Our explainer on share buybacks covers how buybacks affect your balance sheet and the compliance steps required.

6) Keep The Paper Trail

• Save valuations, quotes, emails, board minutes, and draft/final contracts. These are vital if a transaction is later questioned.
• If in doubt, pause and take advice - acting early can protect both the company and directors.

Buying From A Distressed Seller? Protect Yourself

It’s not only the seller who faces risk. Buyers can find a liquidator later alleging a transfer at undervalue and seeking to claw back the asset or value. If you’re buying assets from a company under pressure:

• Insist on an independent valuation or comparative quotes to evidence fair value.
• Document the marketing process and how price was set.
• Use a robust asset purchase agreement with warranties and indemnities tailored to insolvency risk.
• Consider escrow or retentions where appropriate.
• Be extra cautious if the buyer is a connected party, such as a management buyout vehicle or group company.

If the buyer is within your group, make sure intercompany agreements are on arm’s length terms and consistent with your group structure and governance processes.

Special Cases: Group Reorganisations, IP And Share Deals

Group reorganisations often involve moving assets, IP and teams between entities. That’s fine - but do it deliberately and for proper value:

• IP transfers: Use an assignment for the transfer and an intercompany IP licence or service agreement to reflect ongoing use, with appropriate fees.
• Share movements: For founder rebalances or exits, handle the mechanics via a compliant share transfer, and consider valuation and tax. If you are redeeming or buying back shares, follow the statutory process for share buybacks and ensure you have distributable reserves.
• Director or shareholder debt: Formalise director loans and repayments on clear terms. Avoid selective repayments if insolvency risk exists.

These steps won’t just reduce undervalue risk - they’ll also give you cleaner records for investors, auditors and potential buyers down the line.

What Happens If A Transfer At Undervalue Is Found?

If an insolvency practitioner convinces the court that a transaction at undervalue occurred within the relevant period, typical remedies include:

• Restoring the transferred asset to the company’s estate.
• Requiring the recipient to pay compensation equal to the shortfall in value.
• Varying or releasing related security or guarantees.
• Ordering other parties to take steps that put creditors back in the position they would have been in.

Directors may also face separate claims if their duties were breached in approving the transaction. This is why clear governance, proper pricing and a documented business case matter so much at the time you make the decision - not afterwards.

Key Takeaways

• A transfer at undervalue is when your company gives away an asset for nothing or for significantly less than its value; it can be challenged if your business later enters insolvency.
• Transactions within the 2 years before insolvency are at greatest risk (with closer scrutiny for deals with connected persons such as directors, shareholders or group companies).
• Reduce risk by checking solvency, getting independent valuations, documenting commercial rationale, and recording decisions through proper board resolutions.
• Use the right paperwork - for example, a compliant share transfer for equity changes and an intercompany IP licence for group IP moves - and make sure any director remuneration approvals are in order.
• Be careful with insider repayments and distributions; selective repayments of director loans or poorly documented share buybacks can be challenged.
• If you’re buying from a distressed seller, protect yourself with valuations, strong contracts and an audit-ready paper trail to evidence fair value.

If you’d like help structuring a transaction safely - or you’re worried a past deal could be challenged - you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.