Insolvency Act 1986, section 242

Gratuitous alienations (Scotland)

Part VI Miscellaneous Provisions Applying to Companies Which are Insolvent or in Liquidation

(1)Where this subsection applies and—

(a)the winding up of a company has commenced, an alienation by the company is challengeable by—

(i)any creditor who is a creditor by virtue of a debt incurred on or before the date of such commencement, or

(ii)the liquidator;

(b)[F524 a company enters administrationF524] , an alienation by the company is challengeable by the administrator.

(2)Subsection (1) applies where—

(a)M16by the alienation, whether before or after 1st April 1986 (the coming into force of section75 of the Bankruptcy (Scotland) Act 1985), any part of the company’s property is transferred or any claim or right of the company is discharged or renounced, and

(b)the alienation takes place on a relevant day.

(3) For the purposes of subsection (2)(b), the day on which an alienation takes place is the day on which it becomes completely effectual; and in that subsection “relevant day” means, if the alienation has the effect of favouring—

(a)a person who is an associate (within the meaning of the Bankruptcy (Scotland) Act [F5252016F525] ) of the company, a day not earlier than 5 years before the date on which—

(i)the winding up of the company commences, or

(ii)as the case may be, [F526the company enters administrationF526] ; or

(b)any other person, a day not earlier than 2 years before that date.

(4)On a challenge being brought under subsection (1), the court shall grant decree of reduction or for such restoration of property to the company’s assets or other redress as may be appropriate; but the court shall not grant such a decree if the person seeking to uphold the alienation establishes—

(a)that immediately, or at any other time, after the alienation the company’s assets were greater than its liabilities, or

(b)that the alienation was made for adequate consideration, or

(c)that the alienation—

(i)was a birthday, Christmas or other conventional gift, or

(ii)was a gift made, for a charitable purpose, to a person who is not an associate of the company,

which, having regard to all the circumstances, it was reasonable for the company to make:

Provided that this subsection is without prejudice to any right or interest acquired in good faith and for value from or through the transferee in the alienation.

(5) In subsection (4) above, “charitable purpose” means any charitable, benevolent or philanthropic purpose, whether or not it is charitable within the meaning of any rule of law.

(6)For the purposes of the foregoing provisions of this section, an alienation in implementation of a prior obligation is deemed to be one for which there was no consideration or no adequate consideration to the extent that the prior obligation was undertaken for no consideration or no adequate consideration.

(7)A liquidator and an administrator have the same right as a creditor has under any rule of law to challenge an alienation of a company made for no consideration or no adequate consideration.

(8)This section applies to Scotland only.

Definitions used in section 242 3

the company

2 Section 233B does not apply in relation to a contract for the supply of goods or services to a company (“the company”) where any of paragraphs 3 to 11 applies.

Defined in Sch.4ZZA para.2 · see it in the full Act
enters administration

(b) a company “enters administration” when the appointment of an administrator takes effect,

Defined in Sch.B1 para.1(2) · see it in the full Act
administrator

1 (1) For the purposes of this Act “administrator” of a company means a person appointed under this Schedule to manage the company’s affairs, business and property.

Defined in Sch.B1 para.1(1) · see it in the full Act

Cases considering section 242 4

MacDonald and another v Carnbroe Estates Ltd (Scotland)

[2019] UKSC 57 · 4 December 2019Interprets

The section objectively protects an insolvent company’s creditors against alienations producing materially less than an arm’s-length transaction would yield in the relevant circumstances. It also provides mandatory but flexible restorative remedies (see paras [19]-[20]; [37]; [49]-[65]). The provision prescribes a two-year challenge period for ordinary transferees and a five-year period where the transferee is an associate of the insolvent company (see paras [20]; [28]). The court must grant at least one specified form of restorative redress unless the transferee proves a statutory defence. The provision permits credit for consideration paid by a bona fide purchaser but creates neither a general equitable nor a damages jurisdiction (see paras [20]; [49]; [53]; [63]-[65]). The transferee bears the burden of establishing one of the listed circumstances which precludes restorative relief (see para [20]). Adequate consideration is assessed objectively in all the circumstances between hypothetical good-faith parties acting at arm’s length. Carnbroe failed to prove it because there was no evidence comparing the price with likely net realisations in formal insolvency or by the security holder (see paras [30]-[40]; [42]). The subsection preserves the liquidator’s and administrator’s common-law right to challenge an alienation made for no consideration or no adequate consideration (see para [21]).

Brown and another, the Joint Administrators of Loanwell Limited v Stonegale Limited

[2016] UKSC 30 · 22 June 2016Interprets

The court interpreted section 242 as preventing dispositions through which company assets are transferred beyond creditors’ reach without reciprocal consideration. The availability of alternative remedies does not preclude a challenge where the statutory requirements are satisfied (see paras [17]-[18]). Section 242(1) permitted the administrators to challenge the four dispositions because they were gratuitous alienations made before the companies entered administration. The existence of possible alternative remedies did not make that challenge unavailable (see paras [1]-[2]; [16]-[18]). The court identified section 242(2) as applying where an alienation transfers company property or discharges or renounces a company claim or right (see para [1]). The provision defines a relevant day by reference to a specified period before the company enters administration. The challenged dispositions were made on relevant days (see paras [1]-[2]). On a successful challenge, the court must grant reduction, restoration of property or other appropriate redress. Relief is unavailable if the person upholding the alienation proves adequate consideration. No adequate consideration existed because the companies received nothing and there was no reciprocity between the dispositions and the earlier payment to the bank (see paras [1]; [13]-[17]).

Henderson v Foxworth Investments Limited and another

[2014] UKSC 41 · 2 July 2014Limits

The statutory challenge depended on the sale being a gratuitous alienation. The Court upheld the finding that it was made for adequate consideration, so reduction under the section was unavailable (see paras [22]-[27]; [69]). Cited only. The adequate-consideration requirement was satisfied where an enforceable debt-assumption obligation was undertaken as the counterpart of the seller’s obligations before completion. Contemporaneous documentation was unnecessary if the obligation was then made; later documents could record it. The alienation was therefore not challengeable (see paras [22]-[27]; [69]).

What each judgment says about section 242 is in the case-law panel in the full Act.

Amendments and notes

13 notes from legislation.gov.uk

Amendments

  1. F524Words in s. 242(1)(b) substituted (15.9.2003) by 2002 c. 40, ss. 248(3), 279, Sch. 17 para. 28(2) (with s. 249(1)-(3)(6)); S.I. 2003/2093, art. 2(1), Sch. 1 (subject to arts. 3-8 (as amended by S.I. 2003/2332, art. 2))
  2. F525Word in s. 242(3)(a) substituted (30.11.2016) by The Bankruptcy (Scotland) Act 2016 (Consequential Provisions and Modifications) Order 2016 (S.I. 2016/1034), art. 1, Sch. 1 para. 4(5)
  3. F526Words in s. 242(3)(a)(ii) substituted (15.9.2003) by 2002 c. 40, ss. 248(3), 279, Sch. 17 para. 28(3) (with s. 249(1)-(3)(6)); S.I. 2003/2093, art. 2(1), Sch. 1 (subject to arts. 3-8 (as amended by S.I. 2003/2332, art. 2))

Modifications

  1. C816S. 242 excluded (25.4.1991) by Companies Act 1989 (c. 40), ss. 154, 155, 165(2)(a); S.I. 1991/878, art. 2, Sch.
  2. C817S. 242 restricted (25.4.1991) by Companies Act 1989 (c. 40), s. 182(4), Sch. 22 para. 8(2)(a); S.I. 1991/878, art. 2, Sch.
  3. C818S. 242 applied (with modifications) (S.) (6.4.2001) by S.S.I. 2001/128, reg. 4(1), Sch. 2
  4. C819S. 242 applied (with modifications) (17.2.2009 for certain purposes, otherwise 21.2.2009) by Banking Act 2009 (c. 1), ss. 103, 263(1)(2) (with s. 247); S.I. 2009/296, arts. 2, 3, Sch. para. 2
  5. C820S. 242 applied (with modifications) (17.2.2009 for certain purposes, otherwise 21.2.2009) by Banking Act 2009 (c. 1), ss. 145, 263(1)(2) (with s. 247); S.I. 2009/296, arts. 2, 3, Sch. para. 3
  6. C821S. 242 applied (with modifications) (6.6.2013) by The Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013 (S.I. 2013/1388), Pt. 3 reg. 1, Sch. 2 paras. 3, 5 Table (with reg. 24)
  7. C822S. 242 modified (temp.) (retrospective to 27.4.2020) by Corporate Insolvency and Governance Act 2020 (c. 12), Sch. 10 paras. 8(1)(2), 16 (with ss. 2(2), 5(2))
  8. C823S. 242 applied (with modifications) (8.7.2021) by The Payment and Electronic Money Institution Insolvency Regulations 2021 (S.I. 2021/716), regs. 2, 37 (with reg. 5) (as amended (4.1.2024) by S.I. 2023/1399, regs. 1(2), 4, 11)
  9. C824Ss. 242-243 applied (with modifications) (4.1.2024) by S.I. 2021/716, Sch. 1 para. 3 (as amended by The Payment and Electronic Money Institution Insolvency (Amendment) Regulations 2023 (S.I. 2023/1399), regs. 1(2), 20)

Marginal citations

  1. M161985 c. 66.