Understanding Insolvency – Preferences and Statutory Demands

25 June 2015

No matter how carefully managed a company is, most will face issues arising from insolvent trading, or non-payment of debts…read more

1. Preferences

This is an action by a liquidator claiming repayment of monies paid by the company in liquidation to a creditor. At the time of the payment the company must have been insolvent or became insolvent by reason of the payment. The creditor has potential defences, which include, that it had no knowledge of the insolvency of the company. This is essentially an objective test, where all of the circumstances are considered and assessed.

In reality, and in most cases, a liquidator will agree to accept something less than the full amount claimed. This is because of the difficulties the liquidator faces in establishing his case, for example, proving insolvency or because there are potential defences to the claim.

Often a creditor will be aware of the financial difficulties the company is facing. The question then is how best to avoid a possible preference claim being made if the company goes into liquidation? For there to be a preference there must exist a creditor/debtor relationship, for example, if payment is made before the service is provided, then no creditor/debtor relationship exists, and accordingly, there can be no preference.

2. Statutory Demands

The law is quite clear that a creditor cannot use this procedure as a method of debt collection. Such a statement would bring a smile to those familiar with the area given that it is regularly used as a method of debt collection!

There are very strict limits that the debtor must be aware of, and any application to set aside a statutory demand, must be made within 21 days of service. Unless an application is made within this period then the debtor is deemed to be insolvent on the basis of non-compliance with the demand. Effectively, this means that if a winding up application is subsequently issued, then the debtor must be able to prove that it is solvent taking into account the subject debt.

Proving solvency is not easy and regularly requires expert evidence to establish that the company “can pay its debts as and when they become due and payable”.

As mentioned, any application to set aside the statutory demand must be issued and served within the 21 day period. The application must be supported by an affidavit and establish that there is a genuine dispute. This means that full particulars of the dispute, and why the debt is not owed, must be provided.

The most prudent course to adopt when a statutory demand is received is to immediately write to the creditor setting out in detail the defence and demanding that the demand be withdrawn within a strict time limit. If it is not, then application must immediately be made and served within the 21 day timeframe – if the debtor is successful in applying to set aside the demand, then costs should be awarded in favour of the debtor.