Purpose
The purpose is to prevent a creditor obtaining an improper advantage over other creditors of the individual at a time when that individual is insolvent.
Who may bring a claim?
A trustee in bankruptcy (s.340(1)).
What is a preference? – s.340(3)
An individual gives a preference to a person if:
- that person is a creditor (or a surety or guarantor of his debts or liabilities); and
- the individual does anything or suffers (i.e. allows) anything to be done which has the effect of putting that person into a position such that if the individual were to go bankrupt, that person would be in a better position than he/she otherwise would have been in if that thing had not been done.
How and when can a preference be avoided?
A preference is voidable if it was given within the ‘relevant time’ (s.340(1)) i.e. in the six months preceding the date of presentation of the petition leading to the bankruptcy (s.341(1)(c)). The period is extended to two years for preferences to associates (s.341(1)(b) and see s.435).
It must be proved that the individual was insolvent at the time of the preference or became insolvent (meaning either on a cash-flow or liabilities exceeding assets basis) as a result of it (s.341(2)).
It must be shown that the individual was influenced by the desire to prefer the creditor (s.340(4)). This is a subjective test. However, if the preference is given to an associate of the bankrupt individual, there is a rebuttable presumption that the bankrupt individual was influenced by the desire to prefer the creditor (s.340(5)). This shifts the burden of proof from the trustee in bankruptcy to the preferred person to rebut the statutory presumption (see s. 435 for ‘associate’).
Sanction
The court has a discretion to make an order to restore the position as if the individual had not made the preference (s.340(2)). Section 342(1) provides a non-exhaustive list of the types of restoration order that the court might make.