Skip to main content Skip to footer 
As companies slide toward insolvency, difficult choices multiply. Cash might run short, and creditors press for payment. Decisions must be made about who gets paid and who waits. Assets may need selling quickly, perhaps at prices that would be unacceptable in better times. The insolvency legislation recognises that directors facing these pressures may favour certain creditors over others, or dispose of assets on terms that disadvantage the general body of creditors. It provides mechanisms to reverse such transactions after formal insolvency begins.
Tower Bridge Legal handles these claims from both perspectives. We help practitioners identify and pursue viable challenges to pre-insolvency transactions. We defend recipients who believe they received payments or acquired assets entirely legitimately and feel unfairly targeted.
The Logic of Preference Claims
Preference rules exist to prevent companies from cherry-picking which creditors get paid as the ship goes down. Without these provisions, directors could ensure that friendly creditors, family members, or companies they control get paid in full while trade creditors and other unsecured creditors receive nothing from the subsequent liquidation. The preference framework allows such selective payments to be clawed back and distributed fairly among all creditors according to insolvency priorities.
A preference occurs when the company does something that puts a particular creditor in a better position than they would have enjoyed in the liquidation. Paying off a debt completely is the obvious example. Granting security over company assets to a previously unsecured creditor achieves the same result by moving them up the creditor hierarchy. The test is whether the recipient ends up better off than they would have been had no transaction occurred.
Preferences can take numerous forms beyond simple payments, which include granting charges over company property, transferring assets in satisfaction of debts, and releasing the company from obligations owed to it. Anything that improves a creditor’s ultimate position relative to other creditors potentially falls within the scope.
What Must Be Proved
Establishing a preference requires more than simply showing that a creditor received something valuable shortly before insolvency. Several additional elements must be satisfied, and each provides potential defence opportunities.
The company must have been insolvent at the relevant time, or become insolvent as a consequence of the transaction. The statutory definition of insolvency focuses on inability to pay debts as they fall due, or having liabilities exceeding assets. Payments made while the company remained genuinely solvent fall outside the preference rules entirely, whatever their other characteristics.
The transaction must fall within the statutory time window. For ordinary arm’s length creditors, this means the six months immediately preceding the onset of insolvency. For connected parties such as directors, shareholders, family members of directors, and companies controlled by directors, the window extends to a full two years. The longer period reflects the greater suspicion that properly attaches to transactions benefiting insiders.
Most significantly, the company must have been influenced by a desire to put the creditor in a better position than they would otherwise enjoy. This subjective element distinguishes unlawful preferences from ordinary commercial payments made for legitimate business reasons. A company that pays a supplier because it desperately needs continued supplies was motivated by commercial necessity, not by desire to prefer that supplier over others. A company that pays a creditor to avoid threatened legal proceedings was responding to commercial pressure, not showing favouritism.
For connected parties, the legislation presumes that the necessary desire existed. The burden shifts to the recipient to prove that no such desire influenced the company’s decision. This reversal recognises both the difficulty practitioners would otherwise face in proving motivation, and the inherent suspicion surrounding payments to insiders when a company is struggling.
Defending Preference Claims
Recipients facing preference claims have genuine defences available, and many claims fail or settle cheaply because these defences prove stronger than practitioners initially appreciated.
Challenging the presumed or alleged desire to prefer often provides the most promising defence route. Evidence of commercial justification matters enormously. A supplier who threatened to stop deliveries unless outstanding invoices were cleared was paid because the company needed those supplies, not because the company wanted to prefer that supplier. A creditor who instructed solicitors to issue winding-up proceedings prompted payment to avoid liquidation, not as a favour. We help clients assemble and present evidence demonstrating ordinary commercial motivation for the payments they received.
The commercial context often reveals legitimate explanations. Was this creditor always paid on these terms? Did the payment pattern change as insolvency approached, or remain consistent with historical practice? Was pressure being applied that explains the payment timing? These factual questions frequently determine outcomes.
Other defences address the technical statutory requirements. Was the company actually insolvent at the relevant date? Balance sheet tests and cash flow tests can produce different answers. Expert accountancy evidence may establish that insolvency occurred later than the practitioner claims, taking transactions outside the statutory window.
Was the recipient genuinely a connected party within the statutory definitions? The categories are specific and technical. Someone who appears connected may fall outside the definitions on proper analysis. We examine connected party status carefully in every relevant case.
Has the claim been brought within applicable limitation periods? Practitioners sometimes delay pursuing claims, and limitation defences can defeat otherwise strong cases.
Transactions at Undervalue
Undervalue provisions address a different concern. They target transactions where the company gave away value without receiving adequate return, such as selling assets for less than they were worth, transferring property to connected parties at token prices, writing off debts that could have been collected, or providing services to related entities without proper charge.
The key question is whether what the company received fell significantly short of what it provided. The comparison must be made at the time of the transaction, not with hindsight. Unlike preferences, the motivation behind the transaction does not matter. Even a transaction entered into for entirely innocent commercial reasons can be challenged and reversed if the value equation was badly skewed.
Requirements for Undervalue Claims
Undervalue claims have distinct technical requirements. The transaction must have occurred within the two years immediately preceding insolvency onset. This longer period than applies to preferences against unconnected parties reflects the serious harm that asset-stripping causes to creditors.
The company must have been unable to pay its debts at the time of the transaction, or must have become unable to pay its debts as a consequence of the transaction. This insolvency requirement links the undervalue transaction to the company’s financial difficulties and prevents challenge of transactions entered into while the company remained genuinely healthy.
The court must be satisfied that the company received nothing, or received consideration worth significantly less than what it provided. This requires valuation evidence, which frequently becomes the battleground in contested cases. What was property actually worth at the transaction date? Market conditions, the company’s circumstances, and the need for quick sale all affect value. Hindsight can make transactions look improvident when they actually reflected genuine market conditions and reasonable commercial judgement at the time.
Defending Undervalue Claims
The primary defence challenges the undervalue itself. Perhaps the company received more value than the practitioner acknowledges. Perhaps non-monetary consideration should be taken into account. Perhaps the asset was worth less than claimed due to defects, market conditions, or restrictions on its use.
Valuation disputes require expert evidence. Different valuers applying different methodologies can reach substantially different conclusions. The choice of valuation date matters. Assumptions about market conditions and hypothetical buyers affect outcomes. The team at Tower Bridge Legal works with experienced valuation experts to build the strongest possible case on value.
Good faith subsequent recipients have statutory protection. If property was transferred at undervalue and then passed to someone else who acquired it for full value without knowing the circumstances, that innocent purchaser may resist claims to recover the property from them. The undervalue claim may still succeed against the original recipient, but cannot unwind the subsequent transaction.
Directors may invoke a specific statutory defence. If the company entered the transaction in good faith for the purpose of carrying on its business, and there were reasonable grounds for believing the transaction would benefit the company, the court may decline to make an order. This defence recognises that commercial judgements made genuinely at the time should not automatically be condemned because hindsight reveals problems.
Practical Challenges
These claims involve significant practical difficulties for everyone involved. Valuation disputes consume substantial costs in expert evidence and can produce unpredictable results. The company’s financial position at historic dates must be reconstructed, often from incomplete records and with the assistance of people whose interests may not align with accurate reconstruction.
Documents disappear over time. Witnesses have imperfect memories of events that may have occurred years earlier. Those most closely involved often have personal stakes in how events are characterised. Contemporaneous documents carry far more weight than later recollections, making documentary preservation crucial for both sides.
Limitation periods create urgency for practitioners. Claims not brought within statutory time limits are lost forever, regardless of merit. For potential defendants, the passage of time without claims being pursued may provide some comfort, but certainty only comes once limitation has definitively expired.
What Courts Can Order
Successful claims give courts wide remedial powers. Recipients can be ordered to return property or pay sums representing its value. Security granted to preferred creditors can be set aside. Guarantees and other obligations that were released can be revived. The goal is restoring the position that would have existed had the impugned transaction never occurred.
Courts can also make orders against subsequent recipients who acquired property from the original transferee. Assets cannot be placed beyond reach simply by passing them through multiple hands. However, good faith purchasers for value without notice enjoy protection.
Our Role
We advise on both sides of these disputes, bringing practical experience of which arguments actually work and how cases typically resolve. For practitioners, we assess potential claims realistically, identify the strongest targets, and pursue viable claims efficiently. For recipients, we scrutinise claims carefully, identify defences, and negotiate effectively to achieve the best available outcome.
Contact Tower Bridge Legal if you face a preference or undervalue dispute, whether pursuing a claim or defending one.
