Transactions at an undervalue

Businesses that are in financial trouble may be under pressure to sell assets and therefore offer them at discounted prices. Whilst such offers can seem attractive, there are significant risks associated with turning a blind eye to the circumstances of an insolvent seller. Transactions at an undervalue are always a cause for concern, however with total company liquidations having risen 6.5% to 4,242 in the third quarter of 2011, compared with the same period in the previous year, vigilance should be heightened.

The dangers of buying at an undervalue

The dangers of buying assets at an undervalue include the fact that should the seller company go into liquidation, an administrator or liquidator may apply to the court if he believes the purchaser entered into the transaction at an undervalue. As a result the court could order reversal of the sale. Such a challenge could occur up to 2 years after the transaction took place, and therefore especially in larger transactions, it is advisable that purchasers check the liquidity of a seller before concluding any purchase.

In any situation reversal of the sale would not be desirable since the purchaser would have spent time and money in securing the asset and may now rely upon using it. In practice, the administrator or liquidator of the vendor may pursue the purchaser for the difference between the purchase price and true market value at the time of purchase, before they issue proceedings.

Should assets be purchased for a bargain price from an insolvency practitioner, rather than the company directly, the sale cannot then be challenged on valuation grounds.

Remedy of sale reversal

It is worth noting that even where a vendor company is not insolvent, a company creditor has the remedy of sale reversal if that company believes that a transaction was made for the purpose of putting assets beyond its reach as a creditor. Whilst there is no time limit within which a challenge may be made, the longer the lapse in time since the transaction was made, the more difficult it would be for a claimant to show the intention of the vendor.

Holmes & Hills Solicitors has teams of corporate and commercial lawyers, commercial property lawyers and insolvency lawyers that can assist if you require advice on a particular issues relating to a transaction, or insolvency dispute.