Office holders are often presented with a set of facts that fit neatly within the limitations set by sections 238 or 339 of the Insolvency Act 1986 (the Act). So there is generally no need to enquire further as to whether the purpose of the transaction at an undervalue was to put assets beyond the reach of creditors.


In the minority of cases however, where sections 238 or 339 do not apply, section 423 (transactions defrauding creditors) may provide a useful route to a recovery. Several features of section 423 are relevant here.

  • Firstly, a claim need not be brought by an office-holder. Any 'victim' of the transaction may challenge it, and a 'victim' is defined as anyone who is, or is capable of being, prejudiced by the transaction.
  • Secondly, there is no requirement for the debtor to be insolvent, either at the time of the transaction or at the time of making the application. It is certainly worth bearing this in mind when acting in an advisory capacity, where no insolvency process has begun
  • Thirdly, because an application under section 423 is brought on the basis that the debtor has been fraudulent, the limitation periods on commencing proceedings are very forgiving. Although they will vary from case to case and are dependent upon who brings the action, the general position is that if the claim is brought by an office-holder, the limitation period will run from the date of appointment. It is worth noting that the great majority of claims under section 423 are brought within the context of insolvency, and if neither the office-holder, nor victim, has commenced proceedings within 12 years (or even six years) of the commencement of the insolvency, something is seriously amiss.

The key hurdle to a successful section 423 application is proving that the "real or substantial" purpose of the debtor is to put his or her assets beyond the reach of the creditors, rather than just showing that the transaction was at an undervalue. There may be other purposes as well – indeed there frequently will be, such as a desire to protect the family finances – but as the courts recognise, this will often be the flip side of the same coin, and will not prevent a successful claim. Helpfully, the courts will normally order disclosure of documents passing between a party to a transaction under scrutiny and his or her legal advisers where the documents relate to the setting up of the transaction. Such documents may well contain direct evidence of intention.

If the application is successful, the court has wide powers to restore the position to that which it was prior to the transaction, and in a way that protects the interests of the debtor's victims. This includes the power to overturn transactions, to re-vest property in the debtor, and even to trace assets through a series of transactions. Note however that an application under section 423 is treated as a class action, so the Court is likely to order that any sums recovered be shared amongst all the debtors' creditors.

Given the high instance of transactions at an undervalue and the time it often takes to uncover the relevant facts, you should make a mental note that compared with sections 238 and 239, section 423 offers you a significant degree of flexibility. It is also particularly useful to use in cases where assets were disposed a long time ago (in some cases as far back as 15 years), or where no insolvency practice is underway.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.