8- Preferences PQ Flashcards
Introduction?
Preferences are based on pari passu distribution. If a debtor co gives a preference to a creditor by making a transfer which means on bankruptcy he would have some extra advantage, this offends the principle that all of the debtor’s property should be made available distribute equally among creditors of the same ranking.
Where are the preference provisions found?
s. 239 IA (winding up);
s. 340 IA (bankruptcy)
Order in PQ?
- Introduction
- Where the provisions are found.
- Definitions- 239(2), 340(1);
- Is the co in liquidation/admin/adjudicated bankrupt?
- 239(1)/238(1) and 340(1) - Can X bring the application for the order?
- 239(1)/238(1) and 340(1) - Did the co/debtor give the creditor a preference?
- 239(4)/240(3)
- Re Agriplant Services
- West Mercia Safety Wear v Dodd - Was the co/debtor influenced by a desire to produce the effect in 239(4)/340(3)?
- 239(4) and 340(4)
- Re MC Bacon 1990 - Was the p who was preferred connected with the co/a associate of the debtor?
- 239(6) and 340(5)
- 264
- 435 - Was the preference given at a relevant time?
- 341/240
- Re Thirty Eight Building Society - What order?
- 238(3) and 340(2)
- 241(1) and 342(1) - Limits on orders?
- 241(2)(3) and 342(2)(3)
239(2)/340(1)
Definition of the provision.
239(2)- Where a co has at a TR given a preference the office holder may apply to the court for 239 order.
340(1)- Where a p is adjudicated bankrupt and he has at a RT given a preference, the trustee may apply for 340 order.
Is the co in liquidation/adjudicated bankrupt provisions?
239(1) and 238(1);
340(1)
Who can bring an application for an order?
239(1).238(1)= liquidator or administrator
340(1)= trustee in bankruptcy
239(4) and 340(3)
A co/debtor gives a preference to a person if:
(a) that person is a creditor of the co/debtor, or a surety or guarantor for any of the co/debtor’s debts or other liabilities, and
(b) the co/debtor does or suffers anything to be done which puts that p in a position which, if co/debtor goes into liquid/bank, will be better than the position he would have otherwise been in.
Re Agriplant Services (1997)
239(4)(a)/(b) and 340(3)(a)/(b)
Case: co leased equipment from C. One of the co’s directors and majority SH had personally guaranteed the co’s obligations to C.
Co fell into arrears with C, who threatened to repossess the equipment if no paid.
Co was owed money under a Scottish contract at the time and needed the equipment to complete it so they could receive payment.
In a meeting the director was advised by both an account and solicitor who said that no payment should be made to any creditor, mentioning C specifically.
BUT when co received Scottish payments, director paid £20K to C. When co went into liquidation the liquidator sought to have the transaction set aside under 239. If this were successful, C would have a claim against the director under the guarantee.
Decision:
1. The transaction could be set aside under 239.
- A transaction can be void for preferring a contingent creditor (i.e a creditor whose liability would arise if the preference wasn’t given).
- On the facts, the transaction had the effect of improving both the position of C as a creditor, and the director, as a contingent creditor under the guarantee in the event of the co’s liquidation.
- Though the director argued he did not have the necessary desire under 239(5), since he had only intended to keep the company afloat, this was clearly untrue. He had done so to avoid his personal liability under the guarantee.
- C ordered to repay and had a direct claim against the director.
West Mercia Safetywear Ltd v Dodd [1988]
Case: WM were a wholly owned subsidiary of Dodd. They owed D £3K.
D was a director of both cos and had personally guaranteed Dodd’s bank overdraft.
Knowing both co’s were in financial trouble, D caused WM to pay £3K into Dodd’s account. 3 weeks later both cos go into liquidation.
Decision:
1. Transaction can be set aside under 239 for preferring both Dodd and D as a contingent creditor.
- D had breached his fiduciary duty to WM.
- However, once a co is known to be insolvent, this fiduciary duty is no longer towards SHs. Creditor’s interests override SHs interests in insolvency, so he had breached his duty to the creditors.
- D was guilty of misfeasance of Dodd was ordered to repay the money.
239(5) and 340(4)
The court shall not make an order under this section unless the co/debtor was influenced in deciding to give it by a desire to produce the effect in 239(4)(b) or 340(3)(b) (to prefer)
*Re MC Bacon 1990
Case: Co lost its main customer but decided to continue trading. When its overdraft reached £299K bank called an emergency meeting, where it learned for the first time that customer had been lost and the 2 main directors had retired, leaving M to run the co (though director 1 had returned to do accounts).
The co granted the bank fixed and floating charges over all of its assets to secure the existing £300K overdraft limit.
BUT
Bank said its support would not be forthcoming unless its charge would take priority over the pension fund charge which the co had already granted.
Directors agreed and took comfort from this, assuming the bank’s support meant they were unlikely to go into liquidation. BUT bank later said co should be sold as a going concern, but it went into liquidation shortly after.
Decision:
1. The new language of 239 (and 340) ‘influenced by a desire to do effect in 239(4)(b) (prefer)’ means it is no longer necessary to establish a ‘dominant intention to prefer’, which used to be required under old s.44(1). The new language sets a lesser standard.
- ‘Desire’, unlike intention, is a subjective test, which requires to co/bankrupt to positively wish to improve the creditor’s position in the event of liquidation/bankruptcy.
- For the co/debtor to be ‘influenced’ by desire, the desire only need be 1 of the factors which operated on the minds of those who made the decision. It need not be the only or decisive factor.
- It is unnecessary to show that, had the desire not been present, the co would not have entered the transaction. On the new language this would be too high a standard.
- The test was not fulfilled on the facts because had the co not approved the priority, it would not have remained afloat. The directors had a genuine belief that the co could be pulled around and knew this would be impossible without the bank’s support, so they were not influenced by the desire to prefer.
- Though director 1 had recommended the charge, he did this in the mistaken belief that a charge was not valid unless the co traded for 6 months, so simply thought it meant the bank’s continued support would be guaranteed, not that they would be preferred on a winding up.
239(6) and 340(5)
239(5)- If a co gives a preference to a connected person, it is presumed, unless contrary is shown, that co was influenced by the necessary desire to prefer.
340(5)- if a debtor gives a preference to an associate……
249
Definition of connected with the co.
Director, shadow director or an associate or director or SD, or if he is an associate of the co (435).
435
Definition of associate.
240(1)
Relevant time for winding up.
(1) (a)- RT 2 years ending with onset of insolvency if pref given to a connected person (249).
(1) (b) If not connected, 6 months, ending with onset of insolvency.
(c) and (d) just read.
