Repaying a director's loan before liquidation: preference to a connected person (IA 1986 ss.239-240)

A company gives a preference if it does something that puts a creditor in a better position, in the event of its insolvent liquidation, than the creditor would otherwise have been in (s.239(4) IA 1986). Repaying Felix in full while trade creditors went unpaid does this. For a person connected with the company otherwise than only as an employee, the relevant time is the two years ending with the onset of insolvency (s.240(1)(a)). As a director, Felix is connected, and the payment 18 months before liquidation falls within that period. The company was also unable to pay its debts at the time (s.240(2)). The court may only order relief if the company was influenced by a desire to prefer (s.239(5)). However, where the preference is given to a connected person, that desire is presumed unless the contrary is shown (s.239(6)). Felix bears the burden of rebutting the presumption, and saying that he was pressing for payment may not be enough.

Why B is wrong: The six-month period applies only to unconnected persons; for a connected person such as a director it is two years (s.240(1)(a)).

Why C is wrong: Paying a genuine existing debt is the typical way of giving a preference, because it improves that creditor's position in an insolvent liquidation.

Why D is wrong: Repaying a debt discharges a liability of equal value, so it is not a transaction at an undervalue; the correct challenge is as a preference.

Why E is wrong: Dishonesty is not an element of a preference claim; the test is a desire to prefer, which is presumed for connected persons.