What is a Preference?

What is a Preference?

What is a Preference?

What is a preference? In simple terms a preference is a transaction that results in a party being placed into a better position than they otherwise would have been had the transaction not been entered into. This is set out in sections 238 and 340 of the insolvency act 1986. 

However, before a preference gives rise to a particular problem for the recipient of such a transaction it has to be undertaken at a relevant time and the person who has given the preference has to have been influenced by a desire to prefer. There is a statutory presumption of the desire to prefer in circumstances in which the recipient of a preference is a party who is connected to the party who gave the preference. 

The reason preferences do not automatically result in the recipient having to repay the benefit of such transaction is because in the build-up to insolvency a company or an individual will enter into potentially many transactions. Such transactions may arise at a ‘relevant time’ for the purposes of section 239 and 340 of the insolvency act 1986. However, notwithstanding the fact that the transactions may arise at a relevant time for the purposes of the insolvency act 1986, that in itself is insufficient for a declaration of a preference to take effect. Without the motivation being that person affording the preference was influenced by a desire to prefer, then a preference will not be impermissible by virtue of sections 239 and 340 of the insolvency act 1986. 

However, there is a statutory presumption that if the recipient of a preference is connected to the party giving the preference by virtue of falling within the parameters of section 435 of the insolvency act 1986, then the presumption will be that the recipient has received a preference because of the fact that the giver of the preference was influenced by a desire to prefer the recipient. 

It is perhaps not usual to see the insolvency courts flooded with claims arising from preferences where the recipient is not connected to the person giving the preference. Nevertheless, it is by no means impossible for the person who has received a preference to be challenged on such transaction even if they are not connected to the person who has given them the preference. 

If you are the recipient of a preference you could be called upon by a liquidator or trustee in bankruptcy to repay it.  

Our CEO, Elliot Green is experienced in preference litigation having been involved in the notable case of Green (Liquidator of Stealth Construction Ltd) v Ireland [2011] EWHC 1305 (Ch).  

Recently a preference case arose in the matter of CGL Realisations Ltd, Re [2020] EWHC 1707 (Ch) which referred to a preference as follows: “Section 239 defines a preference as being for the purposes of this case, ‘the company does anything or suffers anything to be done which (in either case) has the effect of putting that person in a position which, in the event of the company going into insolvent liquidation, will be better than the position it would have been in if that thing had not been done’ ( s239(4)(b))”. 

This post is not legal advice and should not be relied upon as such. No liability is accepted for any reliance placed upon this post.

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