Preferences Flashcards
Insolvency Act 1986, s.340/239
Court may make an order on application of trustee in bankruptcy for preferences give by individuals prior to bankruptcy or by companies to liquidation or administration
Five conditions
- Creditor/surety/guarantor
- Effect
- Influenced by desire (subjective test, however only needs to be influence and not the only motivation: Agriplant; Re Bacon)
- Insolvent at time or became insolvent as result
- Preference 6 months/2 years before relevant time
PQ tip: tick of (i), (ii), (iv), (v) and THEN look at (iii)
Re MC Bacon Ltd [1990] BCLC 324
Case: Company granted floating charge to bank to secure existing unsecured overdraft
Decision: No transaction at an undervalue or preference - subject (iii) desire to prefer failed (desire was to keep company alive and to prevent bank for filing for liquidation)
Re Agriplant Services Ltd [1997] 2 BCLC 598
Case: Company leased equipment and one of its directors and majority shareholder guaranteed company’s obligations. Lessor threatening to repossess unless overdue rent paid. Company paid rent (lessor had no knowledge of company’s immune winding up). Three weeks later company wound up.
Held: Preference, since is had the effect of improving the position of both the lessor, as a creditor, and the director, as a contingent creditor under his grantee in the event of an insolvent liquidation of the company
Rule: Preference can be void for preferring contingent creditor; there only needs to be INFLUENCE by a desire to prefer
West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 (CA)
Case: West Mercia Ltd, a wholly owned subsidiary of Dodd Ltd, owed Dodd Ltd £30,000; D was director of both companies and had guaranteed Dodd Ltd’s bank overdraft; D, who knew both companies were in financial difficulties, caused West Mercia Ltd to pay £4,000 into Dodd Ltd’s bank account; within three weeks both companies in liquidation
Decision: Once company insolvent the interest of creditors overrode those of the shareholders; Since West Mercia was known by D to be insolvent when he caused £4,000 to be transferred from its account to Dodd and the transfer was a fraudulent preference made solely to relieve D of personal liability under his guarantee in disregard of the interests of the general creditors of West Mercia, had breached his duty; Repay £4,000
Re Thirty-Eight Building Ltd [1999] 1 BCLC 416
Case: Husband and Wife (H and W) owned all shares in company; H was sole director; W was company secretary and their two children (C1 and C2) were employees; company established pension scheme in which H, W, C1 and C2 were the only beneficiaries and trustee of which were H, W, C1 and C2 and an independent trustee (Required as condition of tax approval); in 1987 pension fund trustees sold land to company for £540,000 of which £54,000 paid and rest left owing y company; in March 1995, when debt to pension fund stood at £532,000, company declared itself trustee for pension fund of land and goods worth £545,000; in December 1996 company put into creditors’ voluntary liquidation
Decision: Not set aside as preference; independent trustee was no connected for transaction within 2 year period; H, W, C1 and C2 (iii) desire was to protect pension fund
Insolvency Act 1986, s.341(1)(b)(c)
Relevant date in bankruptcy is presentation of the petition; a preference given between presentation of bankruptcy petition and vesting of debtor’s estate in trustee is thus not caught by s.340 but is void disposition under s.284(1) unless court validates it or it falls within s.284(4)
Insolvency Act 1986, s.240(3)(e)
Relevant date in winding up, the commencement of winding up; a preference given between presentation of winding up petition and making of the order is thus not caught by s.239 but is a void disposition under s.127 unless court validates it
Insolvency Act 1986, ss.249/435
Persons connected with company
Insolvency Act 1986 s.241(3)/123
Meaning of insolvent
Insolvency Act 1986, s.241(1)/342(1)
Courts powers but “shall”: ss.239(2)/340(2)
Re Yagerphone Ltd [1935] Ch 392
Decision: At the date the security contained in the debenture crystallised the money was not the property of the company nor property in respect of which it could be said that the company had even a contingent interest
Rule: Preference does not form part of floating charge
Insolvency Act 1986, s.241(2)/342(2)
Lack of good faith relevant circumstances irrelevant; sub-transferee protected. N.B. sub-transferee who has relevance circumstances or who is connected is presumed to be in bad faith: ss.241(2A)-(3C)/s.342(2A)(4)-(6)
Re Matthews Ellis Ltd [1933] Ch 458 (CA)
Case: Chariman of company agreed to lend it £3,000 provided loan secured by floating charge and £2,00 used to pay off debt owing to partnership in which chairman was a partner; the partnership was where the company obtained most of their stock
Decision: The transaction must not be severed, but must be regarded as a whole, its substance, and not merely the form… FT void except to the extent chairman provided fresh cash, lent £1,000 and paid £2,000 to use for paying off debt to partnership, irrelevant as was a valid floating charge and this is more like genuine arm’s length transaction
Insolvency Act 1986, s.245(2)
Floating charge created during “relevant time” before “the onset of insolvency” is invalid unless fresh cash/goods/services
Re Fairway Magazines Ltd [1993] BCLC 643
Case: F, director and shareholder in FM Ltd and guarantor of company’s bank overdraft, agreed to lend company up to £75,000 in instalments and secured by a floating charged; as part of the loan F twice deposited £10,000 in company’s overdrawn bank account
Decision: Successfully rebutting presumption in s.239(6) that the floating charge executed in his favour by F Ltd had been done with the desire of putting the applicant in a better position and was not invalid as a preference; since the payment of the two sums of £10,000 into the company;s bank account did not go to swell the assets of the company but had the effect of reducing the director’s liability under his guarantee to C & Co, they did not constitute the provision of new moneys within the meaning of s.245 and the floating charge to the extent of the £20,000 was void under this section (not fresh cash as the effect was to convert debt into secured debt)
N.B. Goode, in his book, overlooks that payment can count as fresh cash but not substitution for existing unsecured liability
