UK: Antecedent Transactions: Is A Preference Good Consideration For The Purposes Of S238?

In what appears to be the first case of its type, a court has considered whether a payment, which the court determined was a preference, could nonetheless constitute valuable consideration for the purpose of providing a defence to a transaction at an undervalue claim.

A director of (insolvent) company C had personally borrowed from a lender but at the director’s request, the loan moneys were paid directly to C, and C recorded a debt due to the director. The case concerned a payment by C to the lender, the effect of which was to discharge its debt to C’s director.

In an application by the liquidators of C to avoid the payment, the court held that the transaction was at an undervalue as there was no consideration given by the lender to C for the payment.

The lender argued on appeal that the (indirect) discharge of C’s liability to the director by virtue of the payment to the lender constituted valuable consideration, as there was no requirement in s238 of the Insolvency Act as to who consideration must move from.

The High Court held, however, that the discharge of C’s indebtedness to the director consisted of a preference to the director, and was therefore a preferential payment. As such, the payment was itself inevitably susceptible to challenge, and could not, therefore, amount to consideration.

The case demonstrates that tripartite loan structures cannot be used to avoid the provisions of the Insolvency Act dealing with antecedent transactions.

Source: Barber and Henry v CI Ltd, 8 June 2006, Ch D (Manchester), Case No. 1242 of 2005, HHJ Hodge QC

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The original publication date for this article was 12/10/2006.