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Favouring Creditors and the Risks involved

The risks associated with favouring creditors

Under the Insolvency Act 1986, a transaction putting an insolvent company's creditor at an advantage that they would not have gained in a liquidation process is a "preference". A liquidator can ask a court to invalidate a preference made within six months before a company started being wound up, if the liquidator proves that putting one creditor in a better position was intended. A liquidator can only do so if the company was insolvent when the preference was made or it led to the insolvency. For a preference favouring anyone connected with the company (but not its creditor), the time limit is two years (not six months) before onset of insolvency, and it is presumed it was intended to prefer them. 

Under the Insolvency Act 1986, a transaction appearing to contain a significant imbalance or a business giving away anything of value to another business or person is considered to be a transaction at an undervalue. A liquidator or administrator can ask a court to invalidate a transfer made at an undervalue within two years before a company started being wound up if the company was insolvent at the time of the transaction or it led to the insolvency. For a transaction at an undervalue involving a person connected to the insolvent company, it  is presumed. However, if proven that there were genuine commercial reasons for the transaction at the time it was made, it will not be invalidated. 

Preferences or transactions at an undervalue can be treated as a breach of duty by directors, and a court can compel them to personally repay any relevant money to the company in liquidation. Your insolvency therefore needs to be dealt with properly, without any favouritism.

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