Overview Of Defending A Preference Claim
The matter of defending a preference claim is a question of seeing if the Liquidator bringing the claim has satisfied the requirements for the antecedent transaction known as a Preference.
An insolvency preference is a claim that can be brought by an Insolvency Practitioner when a creditor has been placed into a better position.
By far the most common insolvency preference claims that are brought are against a party that is connected to the company (or bankrupt in the case of a Bankruptcy) such as a Director, Shareholder or associated company.
What Are The Insolvency Preference Payment Requirements To Defend?
For an insolvency preference to arise then the requirements set out in Section 239 of the Insolvency Act 1986 or Section 340 of the Insolvency Act 1986 need to be considered carefully.
The main requirements are as follows:
- The party who received the insolvency preference payment was a creditor.
- The company (or bankrupt) was insolvent (or unable to pay debts when they fall due) or became insolvent due to the transaction ie. the Preference.
- The party who received the Preference was put into a better position than they would have been in the event of Liquidation.
- The transaction arose within two years of insolvency if the receiving party was connected to the company (or bankrupt)
- The company (or bankrupt) was influenced by a desire to put the receiving party in a better position.
When a party is connected to the company (or bankrupt) it is presumed they have been influenced to put the recipient into a better position.
A Court that has to determine an application involving an insolvency preference will typically be well-versed in the mandatory statutory requirements that a Liquidator has to prove to get home on the claim.
Defending An Insolvency Preference Claim
Creditor Position
An insolvency preference payment simply does not get off the ground if the person who has received the Preference is not a creditor of the company.
So for example a person or party who owes money to the company cannot receive an insolvency preference payment. Of course, that might not be all good news because if instead a party owes money to the company and receives further sums from the company then this might be a Transaction At An Undervalue (that they still might have to repay) for example only.
Insolvency Position
A Preference claim also does not get off the ground if the company (or bankrupt) was not insolvent or did not become insolvent as a result of the insolvency preference transaction.
The assessment of whether or not insolvency has arisen is determined with reference to Section 123 of the Insolvency Act 1986 which looks at two key features:
- inability to pay debts when they fall due (cash flow insolvency)
- the level of assets is exceeded by liabilities (balance sheet insolvency)
Most Preference actions are brought against connected parties such as Directors, Shareholders or connected companies (or connected individuals) who will often have detailed knowledge of the financial position or access to the same. On the other hand, the insolvency preference action is brought by a Liquidator who comes to the scene with no direct knowledge and as a stranger to the affairs. As a result, the Liquidator could risk assessing matters without the benefit of the full picture and this may mean someone with greater and better knowledge of the facts is able to defend the insolvency preference claims on the grounds of being able to rebut the evidence presented on insolvency.
Presumption Of Desire
Without the party providing the Preference being influenced by a desire to put a creditor in a better position the claim would also fail. This is potentially a difficult issue that can warrant careful consideration.
Section 239(5) of the Insolvency Act 1986 says:
The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b).
Sub-section (4)(b) says:
the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.
Although in the case of a connected person ‘desire’ is presumed, nevertheless this can be rebutted and indeed this happened in the case of Manolete Partners Plc v Coleman & Ors (Re David Coleman & Co Ltd) [2022] EWHC 2644 (Ch).
Manolete v Coleman Insolvency Preference Claim
In that case, Mr Coleman was able to convince the Court that he had not contemplated an insolvent Liquidation when payments he received had been made and the monies he received were to address his position as a guarantor of the company not to improve his position on Liquidation.
Put Into A Better Position
The determination of what would amount to a better position in the event of insolvent Liquidation is a question of fact.
Many Preferences involve payment of money to the recipient. So the temptation might be to assume that in the case of an insolvent company where creditors do not receive 100 pence in the £ (as would be the norm) that had the payment not been made the creditor would not have received as large a sum on Liquidation.
Whilst it might not be easy to argue against such a proposition if there would be a dividend to creditors in the event of Liquidation there may well be scope for arguing that the creditor does not have to repay the full amount claimed. It would require a careful analysis of the precise factual matrix at work.
