QUESTION: Simphiwe owes a total of R3 million to various creditors. His creditors
include Tebogo to whom he owes R400 000. He also owes R1,3 million to BFN
Bank. Last year Simphiwe invested in a get-rich-quick scheme and as a result he lost
a lot of money. This left him in a dire financial si...
Concept of Voidable Preference: A voidable preference is a transaction that was
entered into by a debtor prior to the sequestration of his estate whereby one
creditor is preferred over others. This takes place when the debtor, who is insolvent
or is threatened by a possibility of insolvency, makes a payment or transfer of an
asset in favor of a creditor, thus preferring such a creditor over other creditors. The
aim of this is to make certain that the preferred creditor receives more than if the
ordinary bankruptcy process were to follow its course.
What Trustee Needs to Prove: In order for a transaction to be set aside as a
voidable preference, a trustee needs to prove the following:
Time of the Transaction: It must have occurred within less than six month s before
the sequestration of the debtor's estate.
Insolvency: The debtor was insolvent at the time of the transaction or the
transaction caused the debtor to be insolvent. Intent to Prefer: The debtor intended
to prefer one creditor over the rest; this in tention resulted in an unfair distribution of
the estate's assets.
The court could hold the transaction void if these elements are established, and the
creditor would have to return the property or the value of the payment to the
insolvent estate.
(b) Undue Preference
Concept of an Undue Preference: An undue preference occurs when the insolvent
debtor pays or transfers money to the creditor with the intent of having that
particular creditor in a better position than the remaining creditors. The act is done
at such a time when the debtor realizes that sequestration is inevitable, and at the
same time performs it in such a way that would result in unfair prejudice to the
remaining creditors.
What a Trustee Must Prove: To set aside a transaction as an undue
preference, a trustee must show that:
The applicable elements are:
Intent to Prefer: The debtor made the payment or transfer with an intent to prefer
one creditor over other creditors
Timing: The payment or transfer was made within six months before the
sequestration of the debtor's estate.
Effect: The transaction had the effect to give that creditor an undue preference.
When these prerequisites are met, then the transaction may be set aside by the
court.
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