(a) Concept of a Voidable Preference
A voidable preference refers to a situation in insolvency law where a debtor, while
facing financial difficulties, preferentially pays one creditor over others before the
insolvency proceedings begin. This preferential payment can be challenged and
poten...
A voidable preference refers to a situation in insolvency law where a debtor, while
facing financial difficulties, preferentially pays one creditor over others before the
insolvency proceedings begin. This preferential payment can be challenged and
potentially reversed by the trustee in insolvency proceedings.
To have a transaction set aside as a voidable preference, a trustee must prove the
following elements:
▪ Pre-Insolvency Payment: The transaction in question must have occurred
within a specific time frame before the insolvency petition was filed, usually
within six months prior to the insolvency or sequestration application.
▪ Preference of a Creditor: The payment or transfer must have been made to a
particular creditor, giving them an advantage over oth er creditors. This
preferential treatment must be evident.
▪ Insolvency at the Time of Preference: The debtor must have been insolvent at
the time of the payment or transfer, meaning their liabilities exceeded their
assets.
▪ Knowledge of Insolvency: The creditor receiving the payment or benefit must
have had knowledge or should have reasonably known that the debtor was
insolvent and that the payment was made with the intention to prefer them
over other creditors.
Reference: Insolvency Act 24 of 1936 (South Africa).
(b) Concept of an Undue Preference
An undue preference occurs when a debtor, who is already insolvent or close to
insolvency, makes a payment or transfer that unfairly favors one creditor over others,
with the intent of giving that creditor a better position than the rest.
To set aside a transaction as an undue preference, a trustee must demonstrate:
▪ Preference of a Creditor: The debtor's action must result in one creditor being
favored over others.
▪ Debtor's Insolvency: The debtor must h ave been insolvent at the time of the
transaction.
▪ Intentional Act: The debtor must have acted with the intention to prefer the
particular creditor, knowing that they were insolvent.
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