Fact pattern (A)

Latton Limited is in financial difficulties. Its creditors include HMRC, employees and various trade creditors. It has also failed to pay quarterly rent of £9 500 to the landlord of its business premises. The landlord, Jack Fisher, is a director of the company. Latton’s liabilities amount to £35 000. A debtor then makes a payment of £12 000 to the company. The board of the company authorises payment of the outstanding rent to Jack Fisher. Consider your advice on the following issues.

Latton Limited is in financial difficulties. Its creditors include HMRC, employees and various trade creditors. It has also failed to pay quarterly rent of £9 500 to the landlord of its business premises. The landlord, Jack Fisher, is a director of the company. Latton’s liabilities amount to £35 000. A debtor then makes a payment of £12 000 to the company. The board of the company authorises payment of the outstanding rent to Jack Fisher.

This transaction is potentially a preference under s.239 IA.

This is because a preference is where a company does something which puts a party into a better position on an insolvent liquidation than he would have been if that thing had not been done. It is worth noting that it is the position on an insolvent liquidation which has to be considered when looking at whether a transaction could amount to a preference. On the face of it, the payment to Jack Fisher would, on an insolvent liquidation, put him in a better position as compared to others owed money by Latton.

For there to be a preference, the party who is put into a better position in the event of an insolvent liquidation must be a creditor, or a surety or guarantor of a debt of the company. In this case, as a landlord owed rent, Jack Fisher is a creditor of the company.

For a transaction to be set aside as a preference, the company must have been influenced by a desire to put a person into a better position on an insolvent liquidation than he would have been had that thing not been done. This is presumed, subject to rebuttal, where the preference is given to a connected person. Here, Jack Fisher, as a director of the company, falls within the category of connected persons. As a result, it will be presumed that Latton was influenced by a desire to put Jack Fisher into a better position. It would be for the latter to rebut this presumption to prevent the transaction being set aside.

Where a company makes payment to a creditor who threatens proceedings or is in some other way insisting on payment, this may suffice to show that there was no desire to prefer. In this case, Jack Fisher would, to rebut the presumption of the company having a desire to prefer him as a creditor, have to convince the court that he had applied genuine commercial pressure to the company to make payment to him of the rent.

An application to the court to set aside the transaction may be presented by a liquidator or administrator in the event that the company becomes the subject of either of these insolvency procedures.