A preference is anything a company does that puts a creditor, surety or guarantor in a better position in an insolvent liquidation than they would otherwise have been in. If the company goes into administration or liquidation, the office holder can ask the court to reverse it under section 239 of the Insolvency Act 1986, provided it happened within six months before the onset of insolvency (two years for a connected person such as a director), the company was insolvent at the time, and the company was influenced by a desire to prefer. Repaying a director’s loan, or paying off a bank debt the director has guaranteed, is the classic target because that desire is presumed for connected persons.
What counts as a preference?
Section 239(4) says a company gives a preference to a person if that person is one of its creditors, or a surety or guarantor for any of its debts, and the company “does anything or suffers anything to be done” that puts that person in a better position in an insolvent liquidation than they would have been in otherwise. The definition is wide. Paying a debt, granting security for an existing debt or returning goods to a supplier can all qualify. Section 239(7) adds that something done under a court order can still be a preference.
Section 239 applies where a company enters administration or goes into liquidation, and the claim belongs to the administrator or liquidator (the office holder). It covers England and Wales; Scotland has its own unfair preference rules in section 243. The Insolvency Service’s guidance for directors makes the same point in plain terms: once a company is insolvent, directors must treat all creditors the same and cannot prioritise one over another.
What time limits apply?
A preference can only be challenged if it was given at a “relevant time” under section 240. The look back period is counted back from the onset of insolvency, which section 240(3) defines for each type of procedure.
| Who received the preference | Look back period |
|---|---|
| Connected person (other than only as an employee) | Two years ending with the onset of insolvency |
| Anyone else | Six months ending with the onset of insolvency |
| Anyone | Between an administration application and the administration order, or between filing a notice of intention to appoint an administrator and the appointment |
Under section 240(3), the onset of insolvency is the date the administration application was made, the date a notice of intention to appoint was filed, the date an out of court appointment took effect, or, for a liquidation not following administration, the date the winding up commenced.
Section 240(2) adds a further condition: the company must have been unable to pay its debts within the meaning of section 123 at the time, or have become unable to pay them because of the preference. That is the cash flow or balance sheet test explained in when a company is insolvent. The statutory presumption of insolvency in section 240(2) applies only to transactions at an undervalue with connected persons, so for preferences the office holder has to show insolvency.
What does “influenced by a desire” mean?
Under section 239(5) the court cannot make an order unless the company, in deciding to give the preference, was influenced by a desire to put that person in a better position. The test looks at the company’s motive, not just the effect. Evidence that a payment was made for a genuine commercial reason, such as keeping an essential supplier delivering so that the business could continue, is relevant to whether that desire existed.
For connected persons the burden shifts. Section 239(6) presumes the desire, unless the contrary is shown, where the preference was given to a person connected with the company otherwise than only by being its employee.
Who is a connected person?
Section 249 treats a person as connected with a company if they are a director or shadow director, an associate of a director or shadow director, or an associate of the company. “Associate” is defined in section 435 and includes:
- a spouse or civil partner, and relatives such as brothers, sisters, uncles, aunts, nephews, nieces, parents, grandparents and children, including in laws;
- business partners;
- employers and employees, with directors and officers treated as employed by the company;
- a company controlled by the same person or group, where control includes directors who are accustomed to act on that person’s instructions or holding one third or more of the voting power.
Group companies under common control are therefore usually connected, which is relevant to intra group repayments; see transfers at an undervalue within groups.
Why are director loan repayments such a common target?
When a director has lent money to the company, the director is a creditor. Repaying a director’s loan account while the company is insolvent puts the director ahead of every other unsecured creditor, the director is connected, the look back period is two years, and the desire to prefer is presumed.
Guarantees create a less obvious version. Because section 239(4) includes a surety or guarantor, paying off an overdraft or loan that the director has personally guaranteed improves the director’s position even though the money goes to the bank. The court can treat that as a preference to the director and, under section 241(1)(e), revive the director’s obligations under the guarantee or order the director to pay the benefit received to the office holder.
What can the court order?
Section 239(3) requires the court to make such order as it thinks fit to restore the position to what it would have been without the preference. Section 241(1) lists examples: property transferred back to the company, money repaid, security released, guarantees revived and new security given for any obligation under the order. Third parties who acquired property or a benefit in good faith and for value are protected by section 241(2), but section 241(2A) presumes a lack of good faith where the recipient knew of the circumstances and the insolvency proceedings, or was connected with the company. The office holder can also assign the claim or its proceeds under section 246ZD.
How might this look for a small company?
Illustration only. A company owes its director £20,000 on his loan account, owes the bank £30,000 on an overdraft he has guaranteed, and owes HMRC and suppliers £65,000. It has been unable to pay its debts as they fall due for a year. Eight months before it enters creditors’ voluntary liquidation, the director has the company repay his loan and clear the overdraft. Both payments fall within the two year window for connected persons, the company was insolvent, and the desire to prefer is presumed. The liquidator can seek an order for the director to repay £20,000 and to pay £30,000 for the benefit he received when the guaranteed overdraft was cleared. If the company had instead paid an unconnected supplier £5,000 eight months before the liquidation, that payment would fall outside the six month window and could not be challenged as a preference.
What mistakes do directors make?
- Treating loan account repayments as “getting my own money back”. In insolvency the director is just another unsecured creditor.
- Prioritising debts they have personally guaranteed, which often leads to a preference claim against them.
- Granting security to a connected lender for money already owed, rather than for new funding.
- Assuming a payment is safe because the company had not yet entered a formal procedure. The window runs back from the onset of insolvency and can reach two years.
- Forgetting that the same payment can also support a misfeasance claim or a breach of the duty to consider creditors, and in extreme cases fraudulent trading.
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Sources
- legislation.gov.uk: Act 1986 c. 45, section 239
- legislation.gov.uk: Act 1986 c. 45, section 238
- legislation.gov.uk: Act 1986 c. 45, section 240
- legislation.gov.uk: Act 1986 c. 45, section 241
- legislation.gov.uk: Act 1986 c. 45, section 249
- legislation.gov.uk: Act 1986 c. 45, section 435
- legislation.gov.uk: Act 1986 c. 45, section 246ZD
- legislation.gov.uk: Act 1986 c. 45, section 123
- GOV.UK: Director information hub director duties upon insolvency
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.