In In re Kerr Aluminium Ltd (In Voluntary Liquidation) [2012] IEHC 386, the High Court dismissed an application by a liquidator that certain payments made by the company in favour of Bank of Ireland be deemed a fraudulent preference within the meaning of section 286 of the Companies Act 1963. The decision is a further reminder of the challenges liquidators face in establishing a dominant intention to prefer one creditor over another in fraudulent preference applications.

The liquidator claimed that while insolvent the company made payments to its current account with Bank of Ireland, which account was overdrawn, in order to reduce a director’s liability. Bank of Ireland held a personal guarantee from one of the company’s directors in relation to the account, which was secured by a first legal charge over a commercial unit and two apartments registered in the name of that director.

The liquidator argued that the director was aware that the company was insolvent in the months prior to the commencement of the liquidation and that he was also aware of his personal exposure on foot of the guarantee and the security he had granted to the bank. The liquidator claimed that in the two months immediately prior to the commencement of the winding up, the company made lodgements to the company’s current account and that such payments conferred a significant personal benefit on the director by reducing his personal liability under the guarantee and the security supporting same.

The facts of the case would appear to have all the ‘text-book’ characteristics of a fraudulent preference action. Indeed, Laffoy J was satisfied that (a) as the current account was overdrawn at all material times, a payment was made by the company in favour of a creditor; (b) at the time the payment was made, the company was unable to pay its debts as they became due; (c) the winding up of the company commenced within six months of making the payment; and (d) at the commencement of the winding up, the company was unable to pay its debts.

However, Laffoy J held that the payments into the overdrawn bank account did not give rise to the inference that the payments were made with the dominant intention of preferring the bank as a creditor; or with the objective of reducing the director’s personal liability on foot of the guarantee and the security which supported it. In reaching its decision, the Court appears to have accepted that it had always been the company’s policy not to hold cash or cheques on its premises for security reasons and to lodge all cheques to its current account lest they should bounce.

Accordingly, Laffoy J found that the liquidator had not discharged the onus of proving that the payments made by the company into its current account were made with the dominant intention of preferring the bank and indirectly preferring the director as surety and chargor.

This decision followed the 2011 decision of the High Court in In re O’Connor’s Nenagh Shopping Centre (In Liquidation) to much the same effect. View an article on that decision here.