Preferring a Creditor: Operative Decision and Intention

When does a company give a ‘preference’ in breach of insolvency legislation? The award-winning corporate attorneys at ParrisWhittaker are highly experienced in advising companies and creditors on corporate insolvency matters when they need timely advice.

An important appeal court ruling on the timing of a decision made to enter into a transaction provides clarity on what may amount to a preference in a creditor’s favour.  The UK Court of Appeal has persuasive authority on the courts in The Bahamas and should be noted.

What is a ‘preference’?

In the corporate insolvency context, a preference occurs when an insolvent company pays one creditor before others with the effect of financially favouring that creditor above other creditors. Doing so can be particularly tempting where, for example, creditors include friends or family or where a debt is owed on more favourable terms than another.

Where a company is insolvent (or the directors know or ought to know the company is heading towards insolvency), the directors have specific legal duties. These include the duty to protects its creditors to minimise their losses, for instance wrongful or fraudulent trading.

The directors must also maximise the financial return to the company’s creditors collectively. Giving a ‘preference’ to one creditor breaches the rules.

What happened in this case?

Comet is an electrical retail giant in the UK which went into administration eight months after it repaid almost £115.5 million of intra-group debt. The liquidator said this amounted to a preference and should therefore be ‘unwound’.

The question for the Court of Appeal was whether that repayment amounted to a preference for the purposes of section 239 of the UK’s Insolvency Act 1986 (similar rules exist in The Bahamas).

A key issue related to the actual timing of the preference. The relevant time under the 1986 Act is two years before the company is unable to pay its debts – during which time there is a presumption that it was an intentional preference if the creditor is a connection person or an associate.  Under The Companies Liquidation Rules and the Companies Winding-Up Amendment Act in The Bahamas, the relevant period is six months.

In November 2011 the company owner entered into a sale and purchase agreement (SPA) in anticipation of the repayment. In February 2012, the repayment was formally authorised by its directors. Essentially, the company itself was not a party to the SPA. Also of note was the fact that there was no suggestion that the board of directors authorising the payment were influenced by a desire to give a preference.

The appeal judges decided against finding a preference had been made. They concluded that the

the company did not formally decide to repay the funds until the board resolution in February 2012. That was the date of the only “operative decision” made.

Further, there was no evidential basis to infer that a decision was made at the early time of SPA.

How can we help?

In each case where a dispute arises in relation to an alleged preference, the matter will be decided on its specific facts and the circumstances leading to the relevant transaction.

For expert advice and representation on corporate insolvency and creditor issues , contact Jacy Whittaker at the expert corporate lawyers at ParrisWhittaker here or telephone +1.242.352.6112

¹Darty Holdings SAS v Geoffrey Carton-Kelly (As Additional Liquidator of CGL Realisations Limited) [2023] EWCA Civ 1135