Section 239 Insolvency Act 1986: Understanding Preferences

Shaun Walker

Mercer & Hole

Insolvency Practitioner

Section 239 of the Insolvency Act 1986 addresses preferences, which are transactions made by a company before insolvency that unfairly place one creditor in a better position than others. The provision empowers a liquidator or administrator to challenge and unwind such dealings.

What Is a Preference?

A company gives a preference when it takes action that:

Improves the position of a creditor, surety, or guarantor, and
Is influenced by a desire to bring about that improvement.

Typical examples include:

Repaying a director’s loan shortly before insolvency
Granting security to one creditor but not others
Settling a debt early to protect a guarantor

These actions can distort the fair distribution of assets, which is why the law allows them to be reviewed and potentially reversed.

The Relevant Time Period

Section 239 applies to transactions made:

Within 6 months before insolvency for unconnected parties
Within 2 years for connected parties (such as directors, relatives, or group companies)

Connected parties are subject to a longer review period because the risk of preferential treatment is higher. Connected parties would be directors, shadow directors or associates of those directors.

The “Desire to Prefer” Test

A crucial element of Section 239 is the requirement that the company was influenced by a desire to prefer the creditor.

For connected parties, this desire is presumed unless proven otherwise.
For unconnected parties, the office‑holder must demonstrate that the company acted with this intention.

This test distinguishes genuine commercial decisions from improper attempts to favour certain creditors.

Why Section 239 Matters

Preferences undermine the principle of equal treatment among creditors. Section 239 helps to:

Prevent last‑minute asset manipulation
Protect the collective interests of creditors
Restore fairness in the insolvency process

By challenging preferential transactions, office‑holders can recover value that should rightfully form part of the insolvent estate.

Court Remedies

If the court finds that a preference occurred, it may order steps to restore the position, including:

Reversing the transaction
Requiring repayment
Setting aside security granted shortly before insolvency

Speak today

Something that a lot of people tend to misunderstand is that the time limit is not 6 months from the date the company enters into liquidation or administration. The relevant time period is when the company became insolvent. This is often a matter that Insolvency Practitioners will contend and will often point to the records of the company to demonstrate that the company was insolvent months before any action was taken to actively place the company into an insolvency procedure.

Insolvency law and processes can be complex, if you or your business are struggling to deal with a potential insolvency event, please do not hesitate to get in touch to see how we can assist you in avoiding insolvency.