Four months before Merlin Ltd went into insolvent liquidation, and while it was already unable to pay its debts, it paid in full the overdue account of its main supplier, an unconnected company. The board minutes show that it did so only because the supplier refused to deliver further stock until paid, and the directors believed the business could not keep trading without that stock. Can the liquidator have the payment set aside as a preference?

Correct answer: C) No, because the company was not influenced by a desire to improve the supplier's position, but by the commercial need to keep receiving stock

Explanation

Under s239 Insolvency Act 1986, a payment is a preference only if the company, in deciding to make it, was influenced by a desire to put the creditor in a better position on insolvency. For an unconnected creditor this desire is not presumed and must be proved. In Re MC Bacon the court held that a company acting to secure continued supplies or finance, rather than from a positive wish to improve the creditor's position, does not have the necessary desire. The payment was within the six-month period for unconnected persons (s240), but that alone is not enough. Paying a genuine debt in full is not a transaction at an undervalue.