Preferences

A preference is a type of antecedent transaction, meaning a transaction entered into prior to a company entering administration or liquidation, or an individual entering bankruptcy, which can be challenged by an insolvency office holder.

A company gives a preference to a person if the criteria set out in sections 239 and 240 IA1986:

1. The person to whom the preference is given is either (i) a creditor of the company; or (ii) a surety or guarantor for any of the company’s liabilities or debts;
2. The company does something, or suffers anything to be done (i.e. permits something to happen that it has the control to stop) which puts the person into a position that is better that the position the person would have been in if the company entered insolvent liquidation, but for that thing having been done;
3. The company was influenced in the decision to give the preference by a desire to prefer the person;
4. The preference was given within the relevant time, which is six months preceding the onset of insolvency, or within two years of the onset of insolvency if given to a connected person;
5. The company was unable to pay its debts at the date of the transaction or was subsequently unable to pay its debts because of the transaction.

An individual gives a preference to a person if the criteria set out in sections 340 and 341 IA 1986. The person to whom the preference is given is either (i) a creditor of the individual; or (ii) a surety or guarantor for any of the individual’s liabilities or debts;

1. The individual does something, or suffers anything to be done (i.e. permits something to happen that it has the control to stop) which puts the person into a position that is better that the position the person would have been in if the company entered insolvent liquidation, but for that thing having been done;
2. The individual was influenced in the decision to give the preference by a desire to prefer the person;
3. The preference was given within the relevant time, which is six months preceding the onset of insolvency, or within two years of the onset of insolvency if given to a connected person;
4. The individual was insolvent at the date of the transaction or subsequently became insolvent because of the transaction.

A common example of a preference would be paying one or more unsecured creditors in priority to other creditors and/or granting security to a previously unsecured creditor.

In corporate insolvency, an administrator or a liquidator can make an application to a court to challenge a preference, seeking an order to set aside the transaction. Administrators and liquidators do not require the permission of a company’s members, creditors or the court to commence proceedings in respect of a preference. However, a liquidator may need the consent of a floating charge holder (if applicable) where in the circumstance, in order to pay the costs arising from the liquidation, the liquidator needs to have recourse to property subject to the floating charge.

In personal insolvency, a trustee in bankruptcy has a similar power to make an application to the court to challenge a transaction amounting to a preference, with a view to obtaining an order setting aside that transaction.

In order to challenge a preference in personal or corporate insolvency, generally an application is filed with the court. Preference claims are ordinarily determined after the court has considered the evidence before it, meaning the summary judgment procedure is unlikely to be appropriate to determine a preference claim.

In order to challenge a preference, it is for the applicant, i.e. the insolvency office holder, to prove that the that the criteria for a preference as set out above are met.

It is important to note that where the relevant company or individual who benefitted from the transaction is connected to the insolvent company/individual, there is a presumption that the company or the individual was influenced by a desire to prefer that person.

A person is connected with a company if that person is:

• A director of the company.
• A shadow director of the company.
• An associate of a director or shadow director.
• An associate of the company.

(Section 249, IA 1986.)

“Associate” is defined in s.435 IA 1986. There are a number of different definitions of associate, depending upon whether a person is an associate of an individual or of a company. Analysing whether a legal or natural person is an associate pursuant to the test in s.435 IA 1986 is complicated and, whilst s.435 does provide some detail as to the meanings of close relatives and “control” of a company, we would recommend seeking legal advice. Edwin Coe’s R&I team is well placed to assist.

There are a number of orders that can be made by the court in relation to a preference claim, as the court can make any order it sees fit in order to restore the position to that which it would have been, had the preference not been given by the company (s.239(3) IA 1986).

If the court makes an order under s.239 or s.240 IA 1986, without prejudice to the generality of those sections, an order made under those sections may require the person who entered into the transaction, or who received the preference, returns either the property or the value of the property to the company.

An applicant might also seek an order releasing or discharging any security given by the company.

Further examples of orders that might be made on a preference claim brought by a trustee in bankruptcy are set out at s.241 IA 1986 which can be accessed here.

There are a number of orders that can be made by the court in relation to a preference claim, as the court can make any order it sees fit in order to restore the position to that which it would have been, had the preference not been given by the individual (s.340(2) IA 1986).

If the court makes an order under s339 or s340 IA 1986, without prejudice to the generality of those sections, an order made under those sections may require the person who entered into the transaction, or who received the preference, returns either the property or the value of the property to the company.

An applicant might also seek an order releasing or discharging any security given by the company.

Further examples of orders that might be made on a preference claim brought by a trustee in bankruptcy are set out at s.342 IA 1986 which can be accessed here.