In a recent High Court case, a liquidator sought an order declaring that certain payments made by a company prior to its liquidation were a ‘fraudulent preference’ and invalid. The company had made payments to its overdrawn bank account which was personally guaranteed by one of its directors. It was alleged that the payments were made in order to reduce the company’s overdraft and therefore, the director’s own personal exposure under the guarantees. The liquidator initiated proceedings against the bank claiming that the company had made regular payments to the bank when the company was insolvent, up to and including a few weeks prior to the liquidation.

The facts of the case appeared to have all the ‘text-book’ characteristics of a case of fraudulent preference. The Court held that the company was insolvent at the time of the disputed transactions and the effect of the transactions was to prefer one creditor in favour of another. However, the Court applied the existing position that the dominant intention of the company must be to prefer one creditor over another and that the liquidator had to prove this. Following an analysis of the company’s bank statements, the Court concluded that there was no evidence to give rise to the inference that the company had made the payments with the dominant intention of preferring the bank over other creditors. In dismissing the application, the Court held that there were plausible explanations as to why the company had continued to lodge all receipts into its account, including, that it was company policy not to retain cash or cheques and to lodge them immediately to its bank account.

This case is another example of the significant evidentiary challenge for liquidators to prove a ‘dominant intention to prefer’ in fraudulent preference cases.

Contributed by Craig Sowman.

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