Received or given a preference payment? Suspect a reference payment?

Are you a creditor that is concerned at a company or individual that has given or received a preference payment? Alternatively, have received a preference payment or are worried that you might have given preference to a creditor then Oliver Elliot can help you consider your options and concerns.

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What Is A Preference?

What is a preference payment? 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 239 and 340 of the insolvency act 1986.

How To Understand An Insolvency Preference Payment Transaction

Simple Example To Demonstrate What Is A Preference Payment

Imagine you are a Mr D (Director of XYZ Limited (“the Company”) and you are also the main shareholder. You have lent the Company £25,000 over a period of time and you are still owed this sum. Unfortunately, the Company has encountered difficult trading conditions and cannot meet its liabilities when they fall due.

You are on the bank mandate and you control who gets paid what from the Company’s bank account. The Company is currently overdrawn at the bank to the extent of £5,000 but fortunately, the Company has just received a payment from a customer of £20,000 and has a variety of creditors pressing it for money in addition to your personal debt of £25,000.

You are aware that the Company might have to go into Liquidation of trading conditions do not improve very rapidly or otherwise, it obtains fresh sources of funds to enable it to continue trading.

You decide to make a payment to yourself of £15,000 to be offset against your debt of £25,000 to reduce the outstanding balance to £10,000. The day after you did that HMRC issued a Winding Up Petition for the Company to be wound up and shortly thereafter it entered Compulsory Liquidation.

The payment of £15,000 is in the vast majority of cases will amount to a clear case of what is a preference payment.

Technical Aspects Of What Is A Preference Payment

Desire To Prefer

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. It is known as what is called an Antecedent Transaction. 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.

There is no need for there to be direct evidence of the requisite desire. Its existence may be inferred from the circumstances of the case.

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 person affording the preference being 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.

Statutory Presumption Of Being Influenced By A Desire To Prefer

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 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))”.

What To Do If You Have Given A Preference Payment?

If you have given a Preference to someone you should discuss it with your company’s Liquidator or your Trustee in Bankruptcy so that the matter can be resolved and sorted out without unnecessary litigation.

No matter what insolvency procedure you are involved in, questions will be asked of you to seek to determine if you have given someone a Preference. If you have answered a questionnaire incorrectly or in error, then you must come clean at the earliest opportunity.

What To Do If You Have Received A Preference Payment?

If you have received a Preference in a liquidation or a bankruptcy, then you will usually need to pay it back to the insolvent estate. If you have received a Preference in circumstances that the party providing the same to you was not influenced by a desire to prefer such that you consider you are able to rebut the relevant statutory presumption, then you may not necessarily be required to pay it back.

Legal Test For A Limited Company Preference Payment

In summary, for the payments or transactions to be preference payments, the person who receives the benefit of the transaction must be a creditor (IA 1986, s239(4)(a)) of the Company and:

  • The transactions must have been made in the period of 2 years ending with the onset of insolvency (IA 1986, s240(1)(a));
  • The transactions must have been made either at a time when the insolvent company was unable to pay its debts within the meaning of the IA 1986, s123, or the company must have become unable to pay its debts within the meaning of that section in consequence of the transaction or preference (IA 1986, s240(2));
  • The payments must put the party receiving the same into a position which, in the event of the company going into insolvent liquidation, is better than the position they would have been had the payments not been made (IA 1986, s239(4)(b));
  • The company must have been influenced by a desire to put the party receiving the benefit of the transaction into a position which, in the event of a company going into insolvent liquidation, is better than the position they would have been had the payments not been made (IA 1986, s239(5)).
  • The decision to make the payments need only be influenced by the desire to put the Respondents into a better position that they would otherwise have been in had the payments not been made. ‘Desire’ is a subjective notion, and may be inferred (Re Oxford Pharmaceuticals Ltd [2009] EWHC 1753 at [75], quoting Millet J in Re MC Bacon [1990] BCC 78 at 87).

How To Avoid Creating A Preference Payment

The simplest way to avoid creating a preference payment is not to give anyone any preference!

If a payment is made for the benefit of the company in liquidation or the bankrupt, such as for proper commercial reasons to enable either to continue trading (and or after being threatened with enforcement action), then it is quite conceivable that the requisite desire will not have been present and therefore no preference may result.

However, the party usually most at risk of receiving a preference payment and being pursued by a liquidator or trustee in bankruptcy for its return, will be parties most closely connected and or associated to the company in liquidation or bankruptcy estate ie. in the case of a company the directors and shareholder and in the case of bankruptcy, the bankrupt’s close family members.

Therefore to materially reduce the risk of payment a preference, ensure that a party most at risk of receipt of a preference, is not paid a higher percentage than the other creditors. Unfortunately, whilst this reduces the risk, it may not necessarily eliminate the risk entirely.

Take professional advice that you can rely upon to address this risk accordingly. Remember that it will be the recipient of the preference payment that is the party at risk of having to repay it.

This article ‘What Is A Preference Payment?’ is not legal advice and should not be relied upon as such. No liability is accepted for any reliance placed upon this article ‘What Is A Preference Payment?’.