INSOLVENCY

Risks of favouring creditors before insolvency



A preferential transaction (or unfair preference) is where a company pays a creditor in preference to other creditors, just before going into insolvency. We advise directors who are facing allegations of wrongful trading or fraudulent trading connected to preference allegations. We also sometimes advise clients who face having a transaction with the debtor set aside because it may constitute a preference, Finally, we also advise creditors who want to make legal representations to the Insolvency Practitioner that the company directors have favoured some creditors over them, unlawfully.

A preferential transaction will usually have the followng elements :-

   1. Transaction - it will be necessary to identify clear dealings which amount to a preference.  The transaction isn usually evidenced through bank account transfers. 

   2. Relationship - Transactions leading up to insolvency with family members and business associates are always likely to be carefully scrutinised. Payment for goods supplied by a creditor is not generally considered preferential, also payment in advance for future works or services is not generally considered preferential. 

   3. Time Period: The time at which the potentially preferential  transaction took place is generally relevant. The closer to insolvency or potential insolvency the more risky and suspicious. For creditors that are not related parties to the company this time limit is six months, if they are related, four years and if there is evidence that there has been interference and delays in the rights of other creditors then a transaction could be voided going back ten years.

Possible defence where there are allegations of insolvency preference

The main defence put forward is that the creditor had no reason to believe that the company would be entering into the insolvency process - this can be particularly difficult to prove, but as a creditor if there is evidence that you have been pressing for payment, you knew other creditors were not being paid and entered into payment agreements, this could be enough of a suspicion that you were aware.

Please note that this is a basic guide, for more information please contact a member of our team.




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