HomeFWJ TakeawayDefences to a Preference Claim?

Aside from the defence that a transaction may have preceded or fallen outside of the Relevant Time, the remaining defences can be summarized as follows:

  • Insolvency – was the company insolvent or did it become insolvent as a result of the transaction?
  • Was there a desire to prefer?

To properly bring a claim for a Preference transaction against the Recipient, a liquidator or administrator is required to prove that the Company either:

  • Was insolvent at the date or time of the transaction; or
  • Became insolvent as a result of the transaction.

This question is not as straightforward as it would appear and often requires a lot of accounting and legal input.

Determining insolvency for a company in liquidation (as an Administrator will rarely bring such proceedings) is not an easy task and requires analyzing the Company’s books and records (which by this point may not be in a perfect working order) and reconstructing the accounts and investigating any ledgers which may need correcting.

Accordingly it is difficult to assess at an early stage whether insolvency can be proven and, if so, whether the evidence of insolvency is adequate.  For example, arrangements with creditors to repay debts may mean that such debts are not outstanding where repayments are being made in accordance with any such arrangement and so the documentary evidence of solvency may be very different to the legal definition.

For this reason it is important to engage the claimant Liquidator at an early stage as they will not issue proceedings if you can demonstrate that the Company was solvent at the time (perhaps by reference to records or transactions that are not immediately obvious to the Liquidator, who comes as a stranger to the background to the Company’s affairs).

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