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ACCA Applied Skills · Corporate and Business Law (Global) · Insolvency and administration

Tarn Ltd is in liquidation. The liquidator finds that six months before liquidation the company, while insolvent, paid off a director's loan in full, leaving other unsecured creditors unpaid. Which is the most accurate analysis of this payment?

The payment may be a preference the court can set aside. While insolvent, Tarn favoured a director by repaying the loan ahead of other unsecured creditors, putting the director in a better position than on liquidation. It is not an undervalue, because a genuine debt was discharged.

  1. AIt is a valid payment because the loan was a genuine debt
  2. BIt is a transaction at an undervalue, since the director gave nothing in return
  3. CIt may be a preference that the court can set aside, because it put the director in a better position than on liquidationCorrect
  4. DIt is wrongful trading by the liquidator

Explanation

A preference arises when an insolvent company puts a creditor in a better position than they would have been in on liquidation, with a desire to do so. Repaying a connected director ahead of others fits this and the court may set it aside. It is not an undervalue because the debt was genuinely owed, so value was given by discharging it.

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