Jurisdiction(s):
United Kingdom

Related legal acts

Key definition

Insolvency definition

What does Insolvency mean? In practice, insolvency describes a financial state where a debtor cannot meet liabilities when due, triggering remedies such as administration, liquidation or bankruptcy and informing directors’ duties and avoidance claims. For companies in England & Wales, Scotland and Northern Ireland, the Insolvency Act 1986, s 123 sets two alternative tests: - Cash‑flow insolvency: an inability to pay debts as they fall due. The inquiry is practical and forward‑looking, not confined to today’s bills (Re Patrick & Lyon Ltd [1933] Ch 786; BNY Corporate Trustee Services Ltd v Eurosail [2013] UKSC 28). - Balance‑sheet insolvency: liabilities (including contingent and prospective liabilities) exceed assets on...

Scotland: Corporate unfair preferences and gratuitous alienations (Insolvency Act 1986 ss 242–243)—hardening periods, statutory/common law challenges, defences, standing and remedies; key case law including Carnbroe

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Practice notes

Sections 242 and 243 of the Insolvency Act 1986 (IA 1986)

In Scotland, these provisions regulate the two principal forms of antecedent transaction that a company may undertake. They do not apply to individuals or to companies registered in England and Wales; for the position in England, refer to the Practice Notes on transactions at an undervalue under section 238 and on preferences under section 239 of the Insolvency Act 1986. For Scottish individual/personal debtors, consult the Practice Note on gratuitous alienations by individual debtors. For a glossary of frequently used Scottish insolvency terminology, see Practice Note: Glossary of Scottish insolvency words and expressions.

Unfair preferences

What constitutes an unfair preference?

An unfair preference is any transaction entered into by a company, whether before or after 1 April 1986, that has the effect of giving one creditor priority over the general body of creditors (IA 1986, s 243(1)). The date on which the unfair preference arises is the date the transaction became effectual.

Hardening periods

A transaction can be challenged as an unfair preference if it occurred not earlier than six months prior to the company’s winding-up (see Practice Notes: Scotland: compulsory liquidation and Scotland: )...

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Web page updated on 21/05/2026

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