When a business is under pressure, decisions get made quickly. You’re juggling creditors, trying to keep trading, and often actring on instinct.
That’s when problems come.
Two areas that come up time and again in insolvency investigations are preferences and transactions at undervalue. They sound technical, but the principle is straightforward… were certain parties treated unfairly when the company was already in trouble?
Let’s break it down properly.
What is a preference?
A preference happens when a company puts one creditor in a better position than others in the lead-up to insolvency.
Typical examples I see:
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Repaying a director’s loan ahead of other creditors
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Settling a debt owed to a family member or connected business
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Paying off a supplier who is threatening action, while others go unpaid
The key test is intention.
Did the company intend to prefer that creditor?
If the answer is yes, a liquidator can challenge the payment and potentially recover it.
And a transaction at undervalue?
This is where a company disposes of assets for less than they’re worth… or gives them away entirely
Common scenarios:
- Selling machinery or vehicles cheaply to a ‘connected party’
- Transferring assets to a new company before liquidation
- Writing off debts without proper justification
If the business was insolvent at the time… or became insolvent because of the transaction… it can be reversed.
Why this matters more than most directors think
Many of these decisions are made with good intentions.
You’re trying to:
- Keep the business alive
- Protect relationships
- Reduce pressure from the loudest creditor
But insolvency law doesn’t look at intention in that way. It looks at fairness across all creditors.
If one party benefits at the expense of others, it raises a red flag.
The danger zone… connected parties
If you take nothing else from this, take this:
Transactions involving connected parties get far more scrutiny.
That includes:
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Directors
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Family members
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Related companies
The look-back periods are also longer.
So something that felt reasonable at the time… say, repaying a director loan to ease personal pressure… can come back months or even years later.
Practical steps to stay on the right side
This isn’t about stopping you from making decisions. It’s about making defensible ones.
Here’s what I advise:
1. Treat creditors consistently
If you’re paying one, ask yourself why not the others. Document the reasoning.
2. Be very cautious with connected parties
If you’re doing anything involving directors, family, or linked businesses… pause and get advice first.
3. Get proper valuations for assets
If you’re selling equipment or stock, make sure it’s at market value. Evidence matters.
4. Avoid ‘last-minute tidy-ups’
Trying to clean up the balance sheet before insolvency often creates bigger problems. Yes, even if your accountant advises it.
5. Keep records of decisions
Why did you make the payment? Why that creditor? Why that price? Write it down.
6. Take early advice
This is where experience pays for itself. A short conversation early can prevent a long investigation later.
A quick reality check
Directors often think:
‘I’ll just settle this one issue and then deal with the rest.’
That’s often how preferences happen.
Or:
‘We’ll move the assets into a new company and start again. Everyone does it’
That’s where transactions at an undervalue come in.
Both are understandable reactions under pressure. And both can create personal exposure if handled badly.
How liquidators approach this
Once a company enters liquidation, one of the first things reviewed is:
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Payments made before insolvency
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Asset disposals
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Dealings with connected parties
If something doesn’t stack up, recovery action can follow.
This isn’t theoretical. It’s standard practice.
Takeaway checklist
If your company is under pressure, run through this:
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Have I treated all creditors fairly?
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Have I made any payments that favour one party over others?
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Have I dealt with any connected parties recently?
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Were assets sold at proper market value?
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Do I have evidence to support those decisions?
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Am I trying to ‘fix’ things quickly rather than properly?
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Have I taken professional advice before acting?
If any of these feel uncomfortable… don’t ignore it.
My Final thought
Most problems in insolvency don’t come from big, dramatic decisions.
They come from a series of small, rushed calls made under pressure.
Slow it down. Think it through. Get advice when needed.
That’s what separates directors who come through this cleanly… from those who end up dealing with it long after the business has gone.