When your business is struggling and cash is tight, it’s natural to prioritise payments. You might pay whoever’s shouting loudest, or help a creditor you’ve known for years. But in insolvency, those well-intentioned decisions can come back to bite.
Under section 239 of the Insolvency Act 1986, certain payments made before liquidation can be classed as “preferences”. If that happens, the liquidator can reverse them and directors may face investigation or personal liability for company debts.
Let’s look at what a preference payment is, how it’s identified, and what you can do to protect yourself.
What does ‘preference’ mean in insolvency?
A preference payment is when a company in financial difficulty pays, transfers assets to or otherwise benefits one creditor more than others, putting that creditor in a better position than they would have been in the liquidation.
The law recognises that directors often make difficult decisions under pressure. So a payment isn’t automatically a preference just because one creditor got paid first. The key question is why it was made.
If the payment was made because the director wanted to prefer that creditor, often called a “desire to prefer”, it can be challenged.
When can a payment be challenged?
Under section 239, a liquidator can apply to the court to have a transaction set aside if:
- The company was insolvent at the time or became insolvent as a result of the payment, and
- The company was influenced by a desire to prefer put one creditor (or guarantor) in a better position than others, and
- The payment happened within a specific time window before liquidation.
That window is:
- Six months before liquidation for ordinary creditors
- Two years before liquidation for “connected persons” (such as directors, relatives, or companies under common control)
Examples of preference payments
To make this clearer, here are common examples of preferences in practice:
- Repaying a director’s loan when other creditors remain unpaid
- Paying off a family member’s loan before trade suppliers
- Making a final payment to a friendly creditor to preserve the relationship
- Transferring company assets (like vehicles or equipment) to a connected person
- Paying off a personal guarantee with company money to protect yourself personally
In each case, the transaction could be overturned by a liquidator if the company was insolvent and the payment shows a clear intent to favour one party over others.
The ‘desire to prefer’ test
This is the heart of section 239. The court looks at the director’s state of mind at the time of the payment.
If the company simply paid a creditor in the normal course of business, for example paying a supplier to keep trading, that usually isn’t a preference.
But if evidence suggests the payment was motivated by personal ties or the wish to protect someone’s position (including your own), the court can infer a ‘desire to prefer’. For connected parties, the law presumes that desire existed unless proven otherwise, meaning the burden of proof falls on you.
What happens if a payment is found to be a preference?
If a court decides a payment was a preference, it can order that the transaction be reversed or repaid to the company.
That might mean:
- A creditor must return money or assets received
- A director’s loan account is re-credited
- Personal funds or guarantees used in the preference are exposed to recovery
In serious cases, the Insolvency Service may also review the director’s conduct, which could lead to director’s disqualification or personal contribution orders if the preference harmed other creditors.
Why this matters for directors
When a company is solvent, directors’ primary duty is to shareholders. But once insolvency looms, that duty shifts and your responsibility becomes protecting creditors as a whole.
Preference payments break that duty because they treat some creditors more favourably than others. Even if you meant well, the law takes an objective view: did the payment unfairly reduce what was available to other creditors?
If so, it can be reversed, and in some cases, you may be personally required to compensate the estate.
How to avoid making a preference payment
If your company is showing signs of financial distress, here are practical steps to protect yourself and your creditors:
- Stop making selective repayments. Treat all creditors equally once you suspect insolvency.
- Avoid repaying director loans. Even small repayments can be clawed back.
- Document decisions. Keep clear board minutes showing your reasoning for payments made.
- Seek professional advice early. A licensed insolvency practitioner can tell you if a proposed payment might be risky.
- Be cautious with connected parties. These transactions attract the most scrutiny.
Early advice often prevents unintentional preferences. Once liquidation begins, the liquidator will review bank statements and related-party transactions in detail, so having clear evidence of intent is invaluable.
Key takeaways
- A preference payment is when a company in financial trouble pays one creditor ahead of others, to that creditor’s advantage.
- It can be challenged if made within six months (or two years for connected parties) before liquidation.
- The test is whether there was a ‘desire to prefer’ that creditor.
- If proven, the transaction can be reversed and may lead to personal liability for directors.
- Taking advice early can stop a simple repayment from turning into a legal problem later.
We’re here to help
If you’re worried that past payments could be seen as preferences, or you’re unsure what’s safe to do before liquidation, speak to us early. Our licensed insolvency practitioners can review your situation confidentially, explain your options, and help you protect your personal position. Contact us today for free, no-obligation advice.
