Once a company has entered into a formal insolvency process, all its assets must be realised and distributed in accordance with the Companies Acts. An attempt to prefer a particular creditor up to two years prior to an insolvent liquidation can be declared void by the courts on the application of the liquidator of the insolvent company. To succeed on such an application, however, the liquidator must prove that the dominant intention of the insolvent company at the time it entered into the transaction was to prefer the creditor in question. As the recent decision of Mr Justice Gilligan in In re O’Connors Nenagh Shopping Centre demonstrates, this is a difficult burden to overcome.  

In that case, the relevant company gave security in favour of a lending bank at a time when it was insolvent. It subsequently went into liquidation and the security interest had the effect of preferring the bank over a large number of unsecured creditors. The liquidator sought to set it aside, claiming that it was a fraudulent preference. He pointed to letters which he said showed that the directors were not under any pressure from the bank to give any security and that their dominant intention was to incentivise the bank to agree to a restructuring and thereby keep the company afloat to save their own investment.

Mr Justice Gilligan in the High Court was unconvinced however. Referring to relevant case law, he noted that it is not sufficient to show that the effect of the impugned transaction is to give a preference: it must be shown that the transaction was entered into with the dominant intention to prefer and that such an intention existed at the time of the transaction. The letters referred to did not show such a dominant intention, but rather showed that the directors were anxious to keep the business going and to implement a restructuring plan. Accordingly, the judge refused to declare the security void.

The decision highlights the high onus of proof on a liquidator who seeks to set aside a transaction under the fraudulent preference provisions in the Companies Acts. Certain transactions entered into by a company prior to an insolvency can also be subject to scrutiny and challenge by a liquidator as a fraudulent disposition. View an article on the difference between a fraudulent preference and a fraudulent disposition here.

Contributed by Craig Sowman.

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