Understanding a Property Transaction at an Undervalue in Insolvency

If a business experiences financial difficulty and becomes insolvent, the appointed officeholder scrutinises the company’s financial affairs to identify whether antecedent transactions have been made.

These are transactions conducted before, or at the time of insolvency, and are typically associated with fraudulent activity or attempts to avoid repaying the company’s creditors the monies they are due.

The nature of antecedent transactions – deliberately made at a time when the company cannot support its required outgoings and liabilities – makes them a causal factor in the organisation’s poor financial situation.

What is a property transaction at an undervalue?

A property transaction at an undervalue is a type of antecedent transaction and involves the transfer or disposal of property. For example, the property may be transferred to a member of the director’s family with no financial consideration.

It means that the property has been deliberately moved out of the company’s ownership, with the resulting loss of a valuable asset that could have been sold to repay creditors. If the property has been transferred for a very low consideration rather than being gifted to the recipient, it’s typically well under the value it would otherwise have achieved had it been sold on the open market.

What happens to a property transferred at an undervalue?

The Insolvency Act provides for the reversal of a property transaction if it’s found to have been conducted at an undervalue. This involves restoring the property to company ownership and allowing it to be sold at auction for the benefit of creditors.

Doing so provides a greater return for unsecured creditors who, as a group, often receive very little in the way of repayment after a corporate insolvency event. In effect, once the property is restored, it’s viewed as never having left the control of the company.

Transferring property at an undervalue is a serious issue and the directors involved in carrying out the transaction are likely to face severe consequences that can affect different aspects of their lives.

So what are the potential ramifications for directors who have made a property transaction at undervalue?

Property transactions at undervalue and the ramifications for directors

Corporate liquidation triggers an Insolvency Service investigation into the way a company has been run, and more specifically, into the events leading up to insolvency. A liquidator can look back two years for dubious transactions that might have jeopardised the company’s financial stability.

If a property transaction at undervalue is found, or indeed any other type of antecedent transaction or wrongdoing, the liquidator’s report can lead to significant sanctions being made against the company director(s) involved.

Consequences can include disqualification as a director for up to 15 years, personal liability for some or all of the business’s debts, and a prison sentence if serious fraud is uncovered during the investigation.

Some professions bar people who have been sanctioned under the Company Directors Disqualification Act (CDDA), so being disqualified as a director may limit their professional lives and general ability to work in the sector they choose.

Directors’ duties to creditors in insolvency

Underpinning this situation is the change in directors’ duties that takes place once a limited company enters insolvency. Directors must be aware of their company’s financial situation at all times and if it does enter insolvency, understand that their duties as directors alter fundamentally.

From placing the company and its affairs first when the business is solvent, priority shifts to creditor interests in insolvency. This means that carrying out any transactions that cause deliberate or unnecessary financial loss to creditors is a breach of those duties.

Article written by Shaun Barton, Real Business Rescue

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