The Two Year Rule: How Long Must You Remain Concerned About Past Transactions
For directors of struggling businesses, a major concern is the extent to which liquidators can investigate historical company transactions. Many assume that once a business has closed, its past dealings are beyond scrutiny. However, United Kingdom insolvency law permits liquidators to review and challenge certain transactions, even years after trading has ceased. Directors may therefore face legal claims long after their company has entered liquidation.
The time frame during which transactions remain vulnerable to investigation depends on the specific type of transaction. The law sets out clear time limits—often referred to as “look back periods”—within which liquidators can examine and challenge such transactions. Understanding these periods is crucial for directors who wish to avoid liability.
Transactions at Undervalue (Section 238 of the Insolvency Act 1986)
A transaction is classed as undervalue when a company transfers assets either for no consideration or for significantly less than their fair market value. For example, if a director arranges the sale of company equipment worth one hundred thousand pounds for only thirty thousand pounds to a relative’s business shortly before liquidation, this may be considered an undervalue transaction.
Liquidators are entitled to challenge these transactions if they took place within two years of the company entering insolvency. Common triggers for such investigations include the sale of assets at reduced prices, transfers of valuable contracts to newly formed companies, or the gifting of company property. Directors may defend these transactions by proving that the sale price reflected the market value, that the transaction was part of ordinary business operations, or that the company was solvent at the time.
Preference Payments (Section 239 of the Insolvency Act 1986)
A preference occurs when a company pays or benefits one creditor over others in the lead up to insolvency. This typically involves repaying loans to connected parties such as family members, business partners, or companies under the director’s control. For example, if a director repays a fifty thousand pound loan to a related company three months before liquidation, this could be deemed preferential.
The relevant time limits differ depending on the recipient. If the payment was made to a connected party, the liquidator can investigate transactions up to two years prior to insolvency. For payments to unconnected creditors, such as suppliers or financial institutions, the period is six months. Directors may defend themselves by showing the payments were made according to a normal schedule, were not intended to prefer one creditor, or occurred while the company was still solvent.
Transactions Defrauding Creditors (Section 423 of the Insolvency Act 1986)
Where assets have been deliberately transferred to avoid creditor claims, the law imposes no time limit at all. If a director moves two hundred thousand pounds in assets to a family member to prevent seizure by creditors, this may be challenged at any point in the future.
Liquidators are entitled to review these transactions indefinitely if there is evidence of fraudulent intent. Actions that may trigger scrutiny include concealing or transferring assets, creating false liabilities, or executing transactions at prices far below market value. To defend against such claims, directors must demonstrate that the transaction had a legitimate commercial basis and that the company was solvent at the time.
Extortionate Credit Transactions (Section 244 of the Insolvency Act 1986)
This category refers to loans obtained on grossly unfair terms, often involving excessive interest rates or punitive repayment conditions. An example would be accepting a business loan at a fifty percent interest rate during a period of financial distress.
Liquidators may examine these arrangements if they occurred within three years prior to the onset of insolvency. Directors may justify such loans by showing that no better financing was available or that the terms were consistent with industry standards at the time.
How Directors Can Protect Themselves
Directors must take several practical steps to protect themselves from future liability. It is essential to maintain detailed records for each significant transaction, clearly documenting the commercial rationale. When disposing of company assets, a formal valuation should be obtained to support the pricing. Directors must take particular care when making payments to connected parties, ensuring all creditors are treated fairly and equitably.
Regular solvency assessments are also critical. Where financial instability is identified, directors should seek independent financial advice. Early engagement with legal counsel is strongly recommended for those approaching insolvency, as proactive guidance can significantly reduce the risk of investigation.
Final Thoughts: Can Liquidators Still Chase You
Although many transaction challenges are subject to a two year statutory limit, directors should be aware that cases involving fraud or misfeasance may be pursued without any time restriction. Directors who have kept comprehensive records, acted in good faith, and sought timely professional advice are usually well positioned to defend themselves.
Directors who have concerns about past transactions should not wait for a claim to be made. Immediate action is preferable and may offer the best chance of avoiding personal liability.
We offer a one hour consultation free of charge. This will allow you to evaluate any potential risks and consider protective steps.
Disclaimer
This article is intended solely for informational purposes and does not constitute legal advice. If you are experiencing financial difficulties or require specific legal guidance, please contact Navigate Business Recovery Limited. You may email vee@navigatebr.com or telephone 0330 236 9937 to schedule a confidential discussion.
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