Office holders will be aware that the issue of preference by companies is governed by section 239 of the Insolvency Act 1986. That section states that a company gives preference to a person if the company ...does anything or suffers anything to be done which has the effect of putting that person into a position which... will be better than the position he would have been in if that thing had not been done before. A commonly used example is where a director who has provided a personal guarantee to the company's bank causes the company to repay the bank before other creditors, thereby putting himself in a better position in the event of the company's insolvency.
Until now, there has been no clarification of how a company may 'suffer' an act to be done. However, the High Court in Re Parkside International Limited (in administration) [2008] EWHC 3654 (Ch) has recently provided guidelines.
The case concerned three companies, A, B and C that had various intra-group debts. All went into administration simultaneously in November 2004. Earlier in the same month, B had assigned to A its right to receive the debt B was owed by C, which had the effect of reducing the estimated divided to unsecured creditors in C's administration from 13 pence in the pound to 5 pence in the pound. The creditors of C argued that the effect of the assignment was to prefer A's position as a creditor in the administration of C and that, although C was not a party to the assignment, its passive participation in the reorganisation of the group's finances was sufficient to amount to C 'suffering' something to be done in accordance with section 239.
The High Court disagreed, and held that the assignment was not a preference by C in favour of A. The Court found that to 'suffer' a transaction to be done requires two tests to each be met:
- the company must be capable of exerting some element of control in relation to the transaction; and
- the company must fail to exercise, or attempt to exercise, that control so as to prevent or obstruct the transaction.
The company must therefore allow a transaction to be done that it has the power to stop or obstruct; permitting or simply failing to prevent a transaction over which a company has no control will not of itself bring a transaction within the scope of section 239. A company does not "suffer" a transaction to be done merely because it is affected by it passively.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
