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Insolvency lawSyllabus GInsolvencyVoidable TransactionsPreferences
This question is part of a case study — click to read the full scenario(Case 58)

Section B - Scenario 5

SCENARIO: 'EcoTransit Ltd' operates an electric scooter network. The company has been losing money for months. By 1st September, the directors realize there is no reasonable prospect of avoiding insolvent liquidation. However, they continue trading for another two months, ordering £50,000 of new scooters on credit. During this time, they also repay a £20,000 unsecured loan owed to the brother of one of the directors. The company finally enters insolvent liquidation on 1st November.

QUESTION: By continuing to trade and incur debt after 1st September, what specific civil offense have the directors committed under the Insolvency Act 1986?

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ACCA · Question 59 · Insolvency law

Section B - Scenario 5

SCENARIO: 'EcoTransit Ltd' operates an electric scooter network. The company has been losing money for months. By 1st September, the directors realize there is no reasonable prospect of avoiding insolvent liquidation. However, they continue trading for another two months, ordering £50,000 of new scooters on credit. During this time, they also repay a £20,000 unsecured loan owed to the brother of one of the directors. The company finally enters insolvent liquidation on 1st November.

QUESTION: The liquidator wishes to challenge the £20,000 repayment to the director's brother as a voidable preference. Because the brother is a 'connected person', what legal advantage does the liquidator have in this claim?

Answer options:

A.

The relevant time period to challenge the transaction is extended to 5 years.

B.

There is a statutory presumption that the company was influenced by a desire to prefer the brother.

C.

The brother is automatically guilty of a criminal offense.

D.

The liquidator does not need a court order to seize the money.

How to approach this question

Recall the special rules for voidable preferences involving connected persons.

Full Answer

B.There is a statutory presumption that the company was influenced by a desire to prefer the brother.✓ Correct
To establish a preference, the liquidator must normally prove the company was influenced by a desire to put the creditor in a better position. However, if the creditor is a 'connected person' (e.g., a director's family member), s.239(6) creates a rebuttable presumption that the company *was* influenced by that desire. The burden of proof shifts to the connected person to prove otherwise. Also, the 'relevant time' looks back 2 years instead of 6 months.

Common mistakes

Forgetting that the burden of proof shifts when dealing with connected persons in insolvency.
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