Transactions at undervalue: director liability under s.238 IA 1986

A TUV is any transfer of value out of the company for consideration significantly less than market value, or for no consideration. The form of the transaction is irrelevant — a sale below market, a gift of an asset, a service rendered without commercial fee, or a grant of security without fresh consideration can all qualify.

The provision exists to protect the unsecured creditor pool. Where directors strip value out of a failing company — to themselves, to connected entities, or to favoured counterparties — section 238 allows the officeholder to reverse the position. The test is objective: the court compares value given against value received at the date of transfer.

Three conditions must be satisfied:

• ›A transaction was entered into — widely defined to include gifts, sales, services, and grants of security.
• ›The transaction was at an undervalue — either a gift, or consideration significantly less than the value provided by the company.
• ›The company was insolvent at the time, or became insolvent as a result — the s.240 condition.

The relevant time window is two years ending with the onset of insolvency (s.240(1)(a)). Where the counterparty is a connected person — director, shadow director, associate as defined in s.249 and s.435 — insolvency at the time is presumed, and the burden shifts to the recipient to disprove it. The connected-party presumption is the single most significant feature of the section in practice.

There is no fixed percentage threshold. Courts assess the difference between what the company gave and what it received, applying market-value benchmarks at the date of transfer. Typical fact patterns that attract scrutiny:

• ›Sale of plant, vehicles, or stock to a director or connected company below open-market value.
• ›Pre-pack-style asset transfers to a NewCo at written-down book value rather than open-market valuation (note SIP 16 disclosure obligations and the Pre-Pack Pool referral regime).
• ›Transfer of intellectual property, customer lists, or goodwill for nominal consideration.
• ›Granting security over company assets for no fresh consideration — note this also engages section 245 separately.
• ›Dividends paid out of insufficient distributable reserves (separately actionable as unlawful dividends).

A respondent has a complete defence if the transaction was entered into in good faith and for the purpose of carrying on the business, and at the time there were reasonable grounds for believing the transaction would benefit the company. Both limbs must be satisfied. Evidence routinely deployed:

• ›Contemporaneous board minutes recording the commercial rationale.
• ›Independent valuations obtained before completion.
• ›Marketing evidence — the company tested the market before sale to a connected party.
• ›Professional advice from accountants, surveyors, or solicitors on the terms.

The defence fails where directors cannot evidence the commercial logic. Retrospective rationalisation does not satisfy the court — the documents must have existed at the time.

Section 241 grants a broad discretion to restore the position to what it would have been but for the transaction. Orders include:

• ›Reversing the transfer (revesting the asset in the company).
• ›Requiring the recipient to pay the difference in value to the company.
• ›Discharging security granted as part of the transaction.
• ›Reinstating obligations the company owed prior to the transfer.

Third-party purchasers acquiring in good faith and for value without notice of the relevant circumstances may take free — but the s.241(2A) presumption against connected persons makes this defence narrow.

• ›Do not destroy or alter records. Obstruction of an officeholder is a criminal offence (s.218).
• ›Obtain independent legal advice — insolvency litigation specialists, not the company's former corporate solicitors.
• ›Locate and preserve every contemporaneous document: valuations, board minutes, correspondence, marketing evidence.
• ›Reconstruct the commercial rationale — why was this transaction in the company's interest at the time?
• ›Assess settlement appetite early. Officeholders frequently accept negotiated settlements where litigation cost and recovery risk make full pursuit uneconomic.

For the companion personal-liability mechanism, see wrongful trading (s.214). For the DLA dimension that frequently overlaps with TUV analysis, see director's loan account & s455. For the duties framework against which TUV decisions are tested, see director duties in financial difficulty.

At IQ Insolvency, every engagement is led by a licensed insolvency practitioner from the first conversation. If you are concerned about a historic transaction or you have received an information request from a liquidator, call 020 8153 1270 for a confidential same-day conversation. No call centres. No handoffs.