When Is A Preference Not A Preference?

Preference payments have always been clear in insolvency law, even where the recipient is unaware of the financial position of the debtor, the amount can still be reclaimed for the benefit of creditors as a whole. This pari pasu premise underpins the entire insolvency regime.

On the face of it, the facts in this case are a simple preference. The bankrupt repaid the stepdaughter £47,675.51 shortly prior to bankruptcy and all conditions for a preference were established to the satisfaction of the judge. However, the stepdaughter pleaded that she was no longer in possession of the funds, which had been repaid to her father from whom she originally loaned the money. She was therefore unable to repay the amount as she no longer had it and forcing her to do so would cause her financial hardship. Whilst the judge acknowledged that her argument could not amount to a defence, he used his discretion not to make an order on the trustee’s application, citing the recipient’s financial position.

The judge saw this case as “out of the norm” as even though the stepdaughter solely owned a house which had equity, attempting to recover the debt may leave her and her children homeless.

The judge stated in his ruling that “the right-thinking person representing the current view of society would not consider it right to exercise legal rights resulting from a preference in this case”.

My initial feeling was that this was a poor decision and completely against the basis of insolvency law. And whilst I still think that it is against insolvency law, I can see where the judge is coming from. Effectively, the stepdaughter lent funds to the bankrupt that were not hers so any repayment to the trustee would come from her own pocket and not from the funds repaid by the bankrupt. The legislation assumes that desire to prefer is one sided yet does not take into account the likelihood of a family member loaning a debtor money against their better judgement and being left significantly out of pocket by any resulting bankruptcy. 

The other side of the argument is that, the judgement is wholly unfair, all creditors are left out of pocket in bankruptcy and which creditor or creditors suffered as a result of the £47k being paid to the father via the stepdaughter. Furthermore, IPs don’t  make a habit of making people homeless, IPs negotiate, and it is unfair to assume that repossession would have been the trustees first port of call. Personally, I’m offended on that point alone. Personal feelings aside, if that was the judge's issue he could have made any other order he saw fit, that the funds be repaid over a certain period of time, that a charging order be grated over the house or that the trustee and the recipient come to a financial payment plan. But he did not, which indicates that he did not think the stepdaughter should be left out of pocket.  

In his closing words, the judge said “there is no danger of this decision opening the flood gates to wash away the importance of s340 of the Act to the statutory scheme and policy of equal distribution” however, whichever side of the fence you're on, this is exactly what this judgement will do. Not only is this likely to affect officeholders appetite to bring such claims but this is also likely to affect funding available or increase the amount of due diligence to be done into the recipient, even when they do appear to have funds available to settle any potential claim.

Whilst I remove the splinters from where I have sat on the fence, I will be watching with anticipation as the trustee mounts an appeal against the judgement.