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July 1996
The act has removed the term "fraudulent" in relation to transactions and payments which could be considered as being preferences. The provisions relating to voidable preferences are contained in section 239, 240 and 241 (companies) and sections 340, 341 and 342 (bankruptcy). The preference may be challenged by an administrator, a liquidator or a trustee by making an application to the court.
Where an action to challenge a preference is commenced on or after 15 September 2003 (the Enterprise Act 2002, section 253, amends Schedule 4 of the IA86 so) a liquidator who intends to take legal proceedings to challenge a preference must first obtain sanction of the liquidation committee or the court.See also paragraphs 31.4.8 and 31.4.8A EA for details of funding such recoveries.
The Enterprise Act 2002, section 262, amends Schedule 5 of the IA86 so the trustee must first obtain sanction of the court or the creditors' committee before he/she takes legal action to challenge a preference that is to be commenced on or after 15 September 2003.
In addition to considering the period when the preference was given (see paragraph 31.4.36) and that a creditor or guarantor has benefited, it is also necessary to consider whether the company or individual was "influenced in deciding to give the preference by a desire" to put the person receiving the preference in a better position than he would have been in the insolvency of the person giving the preference. It is not necessary for the intention to prefer to be the dominant intention of the person giving the preference. Since the Act has replaced the significant words relating to fraudulent/voidable preferences, the court has held the citation of cases decided under the old law to be inappropriate. The court took the view that the previous case law cannot be of any assistance when the language of the statute has changed so completely (Re M C Bacon Ltd [1990] BCC 78).
Notes: Sanction required to take legal proceedings [Schedule 4 Part I, para 3A or Schedule 5 Part I, para 2A]
31.4.33 What is a preference?
The relevant sections define that giving a preference is the doing of anything by a company or individual or the suffering by a company or individual of anything which has the effect of putting either one of its creditors or someone who is a surety or guarantor of one of its debts in a position which, in the event of the company going into insolvent liquidation or the individual being made bankrupt will be better than the position he would have been in if that thing had not been done. An example of giving a preference may be the payment in full of a creditor, where if that had not been done, the company or individual would have only been able to pay a small percentage of that debt during the course of any liquidation or bankruptcy when all creditors are treated equally. That creditor is clearly better off, as is any guarantor of that debt. It is possible that the granting of a fixed or floating charge may be a preference if it occurred during the period of review (see paragraph 31.4.6) and the court may on the application of the liquidator deem it to be invalid.
31.4.34 Effect of pressure by creditor(s)
When a company or individual has made a preference by paying a debt because of threats by a creditor to commence legal proceedings for a recovery, it may be construed that the intention was to eliminate that threat and not to prefer the creditor. It seems that genuine pressure by a creditor remains a defence, where the company or individual believes that it/he had to submit to the pressure from the creditor in order to save itself from insolvency (Re FLE Holdings Ltd [2967] 3 ALL ER 533; [1967] I WLR 1409). However, pressure from creditor(s) is not necessarily a good defence to a claim for recovery of a preference, where it was not the only motive. Even when a company or individual was subject to a court order, the preference may be recovered especially if it is obvious that the company or individual failed to defend the proceedings to the advantage of the creditor. As regards suspect transactions, consideration should be given as to whether the intention was to maintain good relations with a particular creditor (e.g. a bank or supplier). The motives of preferring a creditor and maintaining good relations can co-exist with the latter being evidence of the former.
Notes:[s239(7) and s340(6)]
31.4.35 Property transfers (bankruptcy only)
It is possible for a settlement or transfer made pursuant to a matrimonial court order to be set aside as a voidable preference. It is a matter for the trustee to apply to the court to restore the position to what it would have been had the bankrupt not entered into the transaction. For further details see paragraphs 33.29 to 33.32.
31.4.36 Period of review (July 2007)
Any preference given to a non-connected person by a company or an individual is reviewable if it occurred within the 6 month period prior to the onset of insolvency (see paragraph 31.4.37) provided that the individual or the company was insolvent at the time the preference was given or became insolvent a result of the transaction (see paragraph 31.4.2). The period is extended to 2 years prior to the onset of insolvency (see paragraph 31.4.37) if the recipient of the preference is connected with the company (otherwise than by reason of being its employee) or an associate of the bankrupt. The company or individual which gave the preference must have been insolvent at the time the preference was given or became insolvent as a result of the transaction (see paragraph 31.4.2), although in the case of a connected person, there is a presumption of insolvency. The decision to give the preference should have been made within the above periods. It is not necessary that the transaction occurred during that period of time (Re M C Bacon Ltd [1990] BCC 78). Where the preference is the payment of an outstanding debt the date on which the payments were made not the date on which the original debt was due is the relevant date (Re Willis v Corfe Joinery (In Liquidation) [1997] B.C.C.511) If the company or individual was not insolvent at the time that the preference was given, it will not be voidable. If it can be shown that the transaction was a transaction to defraud creditors, the liquidator or trustee should consider an application under section 423 (see part 8), which is not subject to any time constraints.
Notes:[s240(2) and s341(2)] [s249 and s435] [s240(2) and s341(2)]
Onset of insolvency
The onset of insolvency is defined as follows:-
a) in winding up proceedings
the date of the presentation of the petition; or
the date of the resolution for voluntary winding up;
b) in a case where an administrator is appointed;
by an administration order, the date on which the administration order is made,
under schedule B1, paragraph 14 or 22 following filing with the court of a copy of a notice of intention to appoint under that paragraph, the date on which the copy of the notice is filed,
otherwise than as mentioned in paragraph (a) or (b), the date on which the appointment takes effect;
c) in a case where a company goes into liquidation either following conversion of an administration into a winding up by virtue of Article 37 of the EC Regulation or at the time when the appointment of an administrator ceases to have effect, the date on which the company entered administration (or, if relevant, the date on which the application for the administration order was made or a copy of the notice of intention to appoint was filed), and
d) in bankruptcy proceedings - the date of the presentation of the petition.
Notes:[s240(3)][s341(1)]
31.4.38 Definition of a connected person and associate
A person is connected with a company if he is a director or a shadow director. It is possible for a company’s bank to come within the definition of a connected person if its involvement in the company’s affairs is such as to make it a shadow director (Re a Company No 005009 of 1987 [1988] 4 BCC 424). A person is also connected with a company if he is an associate as defined by section 435 of the Act. In particular, section 435 provides that a person is an associate of an individual if that person is the individual’s husband or wife or a relative, of the individual or the individual’s husband or wife. Other persons may also be associates of an individual.
Notes:[s251] [s435]
31.4.39 Evidence to support an application
It must be shown that there was a desire by the company or the individual to improve the creditor’s position in the event of an insolvent liquidation or bankruptcy order. It is not necessary to establish that there was a dominant intention to prefer but rather that the decision was influenced by the desire to produce the effect as detailed above, i.e. to improve the creditor’s position.
The burden of proof is placed on the administrator, liquidator or trustee to satisfy the court that the company or individual had anticipated the occurrence of insolvent liquidation or bankruptcy and was influenced by a desire to put the creditor in a better position. In the case of a preference given to an associate (other than an employee), the associate must prove that the company or individual was not influenced by a desire to put him into a better position. It should be difficult for directors, shareholders and their relatives and other companies in the same group to retain the benefit of a preference (Re D K G Contractors Ltd [1990] BCC 903). However, in the case of Beacon Leisure Ltd [1991] BCC 213, the court accepted the unsupported denials of the two directors that there was no desire to put themselves in a better position.
Notes:[s239(6) and s340(5)]
The court may make an order to restore the position to what it would have been if the company or individual had not given a preference. Sections 241(1) and 342(1) contain examples of the possible orders the court may make, for further details see paragraph 31.4.31. A third party who purchased a property in good faith and for value is protected. However, there is a presumption that the third party has not acted in good faith if he had notice of the preference and of the pending or actual insolvency, and if he was an associate or connected person.
Notes:[Insolvency (No 2) Act 1994]
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