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Examples of situations where a company may be deemed to have made a preference transaction include payment to an unsecured creditor ahead of others or the grant of security to a previously unsecured creditor.
A preference transaction takes place if the following criteria apply:
- The party is a creditor or a surety/guarantor of the insolvents company’s debts or liabilities
- An action of the company puts the party in a better position if the company goes into insolvent liquidation
- It can be established that the company actively wished to place the party in a better position
- The preference is made at least six months (or two years if a connected party) prior to the company’s insolvency
- The company was unable to pay its debts at the time of the transaction or that the transaction itself led to the company being unable to pay its debts
If the application is successful, the Court has several remedial options available. It can require any property or proceeds of sale to be returned to the company, release or discharge security given by the company or require security to be provided to it, or require any person receiving a financial benefit from the company to reimburse it. Any obligations owed to the company that were released or discharged can be reinstated or new obligations imposed.