If your business is unable to meet its financial obligations, it may be insolvent. Companies facing insolvency cannot treat certain creditors better than other creditors. In other words, they cannot show any preference to one creditor at the expense of others. While there are certain exceptions to this, if a court determines a preference was made, the creditor that benefited from the preference can be ordered to repay the company. This article will explain what a preference by an insolvent company involves and its effects. <\/p>\n\n\n\n
A preference is any activity undertaken by a company that grants one or more creditors an improper advantage at the expense of the other creditors. A creditor is any person to the company who owes money to or has a security interest or benefit of a guarantee by the company. <\/p>\n\n\n\n
Technically, a preference made at any point in time is unlawful. However, only companies in insolvency proceedings have their transactions reviewed. This makes sense, as insolvent companies do not have sufficient assets or cash to meet their liabilities. Therefore, the effect of any preference is only relevant to insolvent companies. <\/p>\n\n\n\n
Consider two of the following examples, which are likely preferences. <\/p>\n\n\n\n