ExpertMedium2 marksMultiple Choice
ACCA · Question 59 · Insolvency law
Scenario: 'GeoThermal Grid Ltd' is facing severe financial difficulties. The directors realize the company cannot avoid insolvent liquidation, but they continue trading for six months, incurring £500,000 in new debts. Just before liquidation, they repay a £50,000 loan to the Managing Director's brother, while ignoring other creditors.
Question: How would the liquidator classify the £50,000 repayment to the Managing Director's brother?
Scenario: 'GeoThermal Grid Ltd' is facing severe financial difficulties. The directors realize the company cannot avoid insolvent liquidation, but they continue trading for six months, incurring £500,000 in new debts. Just before liquidation, they repay a £50,000 loan to the Managing Director's brother, while ignoring other creditors.
Question: How would the liquidator classify the £50,000 repayment to the Managing Director's brother?
Answer options:
A.
A transaction at an undervalue.
B.
A preference.
C.
An extortionate credit transaction.
D.
A floating charge.
How to approach this question
Identify the action: choosing to pay one specific creditor over others right before going bust. This is 'preferring' a creditor.
Full Answer
B.A preference.✓ Correct
Under section 239 of the Insolvency Act 1986, a company gives a 'preference' if it does something that puts a creditor in a better position in the event of the company's insolvent liquidation than they would otherwise have been. Repaying a loan to a family member while ignoring other creditors is a classic example of a preference.
Common mistakes
Confusing a preference with a transaction at an undervalue. A preference involves paying off an existing debt; an undervalue transaction involves giving away assets or selling them too cheaply.
Practice the full ACCA LW — Corporate and Business Law Practice Exam 2
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