Contestable insolvency transactions – Lexology

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One of the main differences in insolvency law between Scotland and England and Wales concerns the regime for contestable transactions under the Insolvency Act 1986.

In both jurisdictions, transactions concluded before the start of formal insolvency proceedings may be challenged if they are prejudicial to the creditors of the insolvent company. However, although the two systems use similar language and address similar concerns, the law in the two jurisdictions is different, especially with different time frames and defenses against challenge.

Free disposal and undervalued transactions

Scotland

England and Wales

Section (s) of the Insolvency Act 1986

242 – gratuitous alienation

238, 240, 241 – undervalued transaction

Questionable period (unrelated parties)

2 years

2 years

Questionable period (related parties)

5 years

2 years

Defenses

Credit balance sheet immediately after the transaction or at any time thereafter; or

Adequate consideration; or

Conventional donation or charitable donation that it was reasonable to make.

The consideration paid is not significantly lower than the consideration received; or

Acted in good faith and with reasonable grounds to believe that the transaction would benefit the business; or

Company capable of paying debts (within the meaning of Article 123 of the Insolvency Law 1986).

Unfair preference

Scotland

England and Wales

Section (s) of the Insolvency Act 1986

243 – unfair preference

239, 240, 241 – unfair preference

Questionable period (unrelated parties)

6 months

2 years

Questionable period (related parties)

6 months

6 months

Defenses

Transaction in the ordinary course of business or affairs; or

Payment in cash of a debt that has become due (except collusion with the aim of harming the body of creditors); or

Operation by which the parties contract reciprocal obligations (except collusion with the aim of harming all creditors); or

Granting of a mandate for the payment of seized funds.

Not influenced by the desire to prefer; or

Company capable of paying debts (within the meaning of Article 123 of the Insolvency Law 1986).

Other points to note are: –

  • Section 244 of the Insolvency Act 1986 (Exorbitant credit transactions) and section 245 of the Insolvency Act 1986 (Avoidance of certain floating loads) apply in both jurisdictions.
  • s.423 (Transactions defrauding creditors) applies to England and Wales but not to Scotland.
  • Scottish law also provides for common law remedies of alienation and preferably free of charge. These are rarely used due to additional evidentiary requirements, but it should be noted that common law remedies are not subject to the time limits that apply to statutory remedies.


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