Understanding key insolvency tools in fraud claims: transaction avoidance and director liability

Insolvency rarely ends the asset recovery story; it is often just the start. Once a counterparty becomes insolvent, the Insolvency Act 1986 opens a second set of remedies: claims to reverse pre-insolvency transactions that depleted the company, and claims against directors or others whose conduct allowed losses to accumulate.

This note covers six key tools available in fraud claims in England (under the Insolvency Act 1986) and most often deployed in asset-recovery work: three to unwind transactions, and three to pursue directors or others personally.

Reversing suspect pre-insolvency transactions

There are a series of provisions under the Insolvency Act 1986 that enable courts to unwind transactions that harmed creditors or stripped value from the company before insolvency. Some insolvency claims are controlled by office-holders, while others may be available to creditors or victims directly. Where a victim cannot bring a particular claim itself, it may still be able to work with, fund or support an office-holder, or pursue parallel civil remedies.

Section 238 – transactions at an undervalue

Section 238 applies where a company transfers assets for significantly less than their true worth. This could include gifts or sales at a deep discount.

If the statutory conditions are met, the court can make orders designed to restore the position for the benefit of creditors. There is a statutory defence where the company acted in good faith, for the purpose of carrying on its business, and there were reasonable grounds for believing the transaction would benefit the company.

The provision applies to transactions made within two years before the company entered administration or liquidation. This is referred to as the 'look-back period'.

A section 238 claim is brought in the context of administration or liquidation and is usually brought by the office-holder.

Section 239 – preferences

Section 239 deals with situations where a company gives one creditor an advantage over other creditors. This often occurs when a company repays a loan early to a friendly lender or guarantees a debt for a connected party. Like section 238, the company has to be insolvent for a claim under section 239 to be brought. A common example is paying down a debt guaranteed by a director while leaving trade creditors unpaid.

If the claim succeeds, the court can make orders to restore the position to what it would have been had the preference not been given.

To succeed under this section, the court must find that the company was influenced by a desire to prefer that creditor. The company must have been influenced by a desire to prefer. Where the recipient is connected, that desire is presumed unless the contrary is shown.

The look-back period is two years for connected parties and six months for others.

Section 423 – transactions defrauding creditors

Section 423 is especially relevant in fraud and asset recovery because it can apply outside formal insolvency and is aimed at transactions intended to put assets beyond the reach of a person who is making, or may make, a claim, or otherwise prejudice that person’s interests.

Section 423 has no fixed look-back period equivalent to sections 238 and 239, but limitation, delay and the timing of the relevant claim still need to be considered. The key question is whether the transaction was entered into for the purpose of putting assets beyond reach or otherwise prejudicing the interests of a person who is making, or may make, a claim.

Unlike sections 238 and 239, section 423 may be available to office-holders and to victims or creditors directly in appropriate cases. For example, transferring valuable assets to a family trust to avoid paying a judgment debt might be vulnerable to challenge under section 423.

Section 423 is powerful, but it is not a shortcut around evidence.

Pursuing directors and others

When a company faces financial distress, directors have a duty to act responsibly and in the interests of creditors. If they fail to do so, the Insolvency Act provides mechanisms to hold them personally accountable. These insolvency remedies may sit alongside claims for breach of directors’ duties under the Companies Act 2006.

These provisions do not simply punish misconduct. They can restore value to the insolvent estate and create routes to personal accountability where misconduct has caused loss.

These claims focus on conduct rather than a single transaction date, although limitation, evidence and the timing of insolvency remain important.

Section 212 – misfeasance

Section 212 addresses breaches of fiduciary duty by directors or other officers. This includes misapplying company funds, retaining property improperly, or failing to exercise reasonable care and skill.

In fraud-related insolvencies, misfeasance claims may arise from unauthorised payments, poor records, diversion of opportunities, misuse of company property or failure to protect creditor interests once the creditor-duty principle is engaged.

The court can order repayment of misapplied funds, restoration of property, or compensation for losses, often with interest.

Claims are ordinarily brought by the liquidator or administrator. In limited circumstances, a creditor or member may bring a claim with the court’s permission.

Section 213 – fraudulent trading

Fraudulent trading applies where the company’s business was carried on with intent to defraud creditors or for any fraudulent purpose. For example, a director might have knowingly incurred debt with no intention of paying it, or falsified accounts to mislead creditors.

The threshold is high: fraudulent trading requires dishonesty, unlike wrongful trading (which is discussed below).

Only the company’s liquidator may initiate a claim for fraudulent trading.

If the claim succeeds, the court may order those knowingly involved to contribute to the company’s assets. The financial consequences can be significant. Fraudulent trading may also carry criminal consequences under section 993 of the Companies Act 2006 and may support disqualification under the Company Directors Disqualification Act 1986.

Liability is not limited to directors; any person knowingly involved in the fraud can be ordered to contribute to the company’s assets. Claims are brought by the liquidator during a winding up and are not subject to a fixed statutory look‑back period.

Section 214 – wrongful trading

Wrongful trading arises where, before the commencement of winding up or administration, a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration. This may include shadow directors.

At that point, directors need to take every step they ought to take to minimise potential loss to creditors. If they fail, the court may order them to contribute to the company’s assets by reference to the loss caused by continued trading.

Claims under section 214 can be brought by a liquidator or administrator.

Key takeaways for fraud and insolvency recovery

In fraud‑related insolvency, timing, intent and evidence matter. The main strategic points are:

• Pre‑insolvency transactions will be scrutinised – undervalue transactions and preferences can be unwound, with connected‑party dealings attracting particular attention. Insolvency remedies can materially extend recovery beyond the insolvent company itself.
• Purpose and conduct are critical – section 423 and preference claims turn on intent and surrounding evidence, while misfeasance, wrongful trading and fraudulent trading focus on how directors behaved as financial distress deepened.
• Directors face personal exposure – once insolvency is likely, directors must prioritise creditors. Failures in judgment, record‑keeping or restraint can lead to personal liability, disqualification and, in cases of fraud, criminal consequences.
• Delay weakens recovery – although some insolvency claims have longer look‑back periods, delay still affects evidence, leverage and outcomes. Where assets may dissipate, insolvency remedies may need to be combined with urgent civil relief.

Used together, these provisions extend asset recovery beyond the company itself: into transactions that ought not to have happened, and into the conduct of directors and others who allowed value to move. Insolvency tools are not a substitute for civil claims; they sit alongside them. The objective is to choose the right combination early enough that there is still something left to recover.

To meet the rise and increasing sophistication of fraud, victims need powerful legal tools and lawyers who know how to use them. In this guide, we provide an overview of the key issues involved in fraud cases and outline some of the fraud litigation tools available in England.

READ MORE

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2026