Could the Minister indicate how this new section 286 differs in its effect from the original section 286 in the 1963 Act?
At present under section 286 of the 1963 Act, fraudulent preference is defined in context of bankruptcy law. The relevant provision is contained in section 53 of the Bankruptcy (Ireland) Amendment Act, 1872, as amended by the 11th Schedule of the 1963 Companies Act. The rule is based on the principle that it is "unjust to permit a party, on the eve of insolvency, to make a voluntary disposition of his property in favour of a particular creditor, leaving the mere husk to the rest, and therefore, that a transfer made at such a period, and under such circumstances, as evidently showed that it was made in contemplation of insolvency and in order to favour a particular creditor, should be void".
The object of section 286 is to prevent an solvent company from giving preference to certain creditors such as directors and their friends when a winding up is imminent to the detriment of its other creditors. Thus section 286 provides at present that any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company within six months before the commencement of its winding up, is invalid if it is a fraudulent preference of any of the company's creditors. The existing section 286 provides that fraudulently preferential transactions may be set aside only if they were effected within the period of six months before the date of winding up. However, situations have arisen where, for example, the directors of a parent company take no steps to put a subsidiary which has become hopelessly insolvent into liquidation. Instead steps are taken to secure the repayment of all inter-company balances owed to the parent and other companies in the group and the directors do all in their power to keep the creditors at bay in the hope that the six months will elapse before a winding up petition can be presented. It is proposed to remedy the first of these problems by extending the period of six months to two years in the case of transactions in favour of connected persons. The term "connected person" is defined in subsection (5) of the section and relates largely to directors and also to related companies. The burden of establishing the preference or the necessary intention to prefer is on the liquidator and is a very difficult one for him to discharge. Consequently, many payments which ought, in fairness, to be recovered are not challenged. It is proposed, therefore, in the present section to reverse the burden of proof in the case of any payment or transfer to or for the benefit of a creditor who is a connected person, as defined.