ExpertHard2 marksMultiple Choice
ACCA · Question 60 · 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: What is the relevant 'look-back' time period for the liquidator to challenge the preference payment made 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: What is the relevant 'look-back' time period for the liquidator to challenge the preference payment made to the Managing Director's brother?
Answer options:
A.
6 months prior to the onset of insolvency.
B.
1 year prior to the onset of insolvency.
C.
2 years prior to the onset of insolvency.
D.
5 years prior to the onset of insolvency.
How to approach this question
Identify that the brother is a 'connected person' to the company. Recall that the preference time limit is extended for connected persons.
Full Answer
C.2 years prior to the onset of insolvency.✓ Correct
Under the Insolvency Act 1986, the relevant time period for challenging a preference is normally 6 months prior to the onset of insolvency. However, if the preference is given to a 'connected person' (such as a director's relative), the time period is extended to 2 years. Furthermore, the desire to prefer is presumed in the case of connected persons.
Common mistakes
Applying the standard 6-month rule, forgetting that the recipient is a connected person which triggers the 2-year rule.
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