The short answer
A preference is when an insolvent company puts one creditor in a better position than the others before it formally fails — for example, repaying a director’s loan or a favoured supplier while leaving HMRC and trade creditors unpaid. Under section 239 of the Insolvency Act 1986, a liquidator or administrator can ask the court to reverse the payment if the company was influenced by a desire to prefer that creditor. The look-back is six months, extended to two years for connected persons.
When money is tight, it is natural to want to pay the people closest to you first — a family member who lent the business cash, a key supplier, or your own director’s loan. But once a company is sliding towards insolvency, the law treats creditors as a group, and favouring one over another can be unwound and even held against a director personally. This guide explains what a preference is, the two look-back periods, and what a liquidator can do about it.
Preference payments at a glance
- Governing law Section 239, Insolvency Act 1986
- What it is Putting one creditor ahead of others
- Key test Desire to prefer that creditor
- Look-back — connected 2 years before insolvency
- Look-back — others 6 months before insolvency
- Remedy Court can reverse the payment
What counts as a preference
A preference happens when a company does something — usually a payment, but it can be granting security or transferring an asset — that puts a creditor, surety or guarantor into a better position than they would have been in if the company had gone into liquidation instead. The classic example is repaying a loan from a director, friend or family member, or clearing one supplier’s account in full, while HMRC and ordinary trade creditors get nothing.
The “desire to prefer” test
Not every payment to a creditor is a preference. The court must be satisfied the company was influenced by a desire to prefer that creditor — in other words, a positive wish to improve their position, not just an ordinary commercial decision to keep a vital supplier on side. Paying a supplier purely because you needed the goods to keep trading is usually defensible; repaying your own director’s loan as the business folds is far harder to justify.
For connected persons — directors, their close relatives, and associated companies — the desire to prefer is presumed, and it is for the recipient to rebut it.
The look-back periods
| Recipient | Look-back before onset of insolvency | Desire to prefer |
|---|---|---|
| Connected person (director, relative, associate) | 2 years | Presumed — recipient must disprove |
| Unconnected creditor | 6 months | Must be proven by the office-holder |
The company must also have been insolvent at the time, or have become insolvent as a result of the payment.
What a liquidator can do
If the office-holder establishes a preference, the court can make whatever order it thinks fit to restore the position, most often ordering the recipient to repay the money to the company so it can be shared among all creditors. Preferences are closely related to — but distinct from — transactions at undervalue, and the same conduct can also support a misfeasance claim against a director.
- The money is recovered for the general body of creditors, not the office-holder personally.
- A connected recipient who cannot rebut the presumption is the easiest target.
- Acting on the conduct also feeds the director-conduct report to the Insolvency Service.
If you are worried a recent payment might be challenged, the safest step is to stop and take advice before doing anything further — see director personal liability.
Worried a recent payment could be unwound as a preference?
Only a licensed insolvency practitioner can assess your timeline and the desire-to-prefer test on your facts. A short, confidential call sets out where you stand.
Frequently asked questions
Is paying a supplier always a preference?
No. Paying a supplier to keep essential goods or services flowing is normally an ordinary commercial decision, not a preference — the office-holder must show a desire to prefer that creditor.
What does ‘connected person’ mean?
Directors, their close relatives, business partners and associated companies. Payments to them carry a two-year look-back and a presumed desire to prefer.
Do I have to repay a preference personally?
The recipient of the payment is usually ordered to repay it. A director can also face a separate misfeasance or personal-liability claim for the same conduct.
When does the look-back start?
From the onset of insolvency — broadly the date the company entered the insolvency procedure, or an earlier petition date where relevant.
Sources & further reading
- Insolvency Act 1986 — section 239 (preferences)
- GOV.UK — Liquidate your limited company
- The Insolvency Service — guidance for company directors
- Company Directors Disqualification Act 1986 — unfit conduct
This guide is general information, not formal insolvency advice. Your situation must be assessed by a licensed insolvency practitioner before you act.