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Corporate insolvency — SQE1 BLP question

A worked single-best-answer question on corporate insolvency, with why each wrong option is wrong — the way SQE1 traps candidates.

Corporate insolvency

Ludlow Ltd entered creditors' voluntary liquidation on 1 September 2026. In March 2025, when it was already unable to pay its debts as they fell due, it repaid in full an unsecured loan of £40,000 made to it by Petra, the sister of its managing director. Its other unsecured creditors were not paid. The liquidator has no direct evidence of why the directors chose to repay Petra. The liquidator wants to recover the £40,000.

Which of the following best describes whether the liquidator can challenge the repayment to Petra?

  1. ANo, because the repayment was made more than six months before the onset of insolvency.
  2. BNo, because the company received full value for the payment, as it discharged a genuine debt.
  3. CYes, as a transaction at an undervalue, because the company received no new consideration for the payment.
  4. DYes, as a preference, because Petra is a connected person, so the relevant time is two years and the company is presumed to have been influenced by a desire to prefer her.
  5. ENo, because the liquidator must prove a desire to prefer Petra and has no evidence of one.
Show answer and reasoning
D is the best answer. Repaying one unsecured creditor in full while insolvent puts that creditor in a better position on liquidation, which may be a preference under s 239 Insolvency Act 1986. Petra, as the sister of a director, is an associate of the director and so connected with the company (ss 249, 435). For connected persons the relevant time is two years before the onset of insolvency (s 240(1)(a)), and the desire to prefer is presumed unless the contrary is shown (s 239(6)).

Rule: A payment to a connected creditor within two years before the onset of insolvency, while the company is unable to pay its debts, may be set aside as a preference, with the desire to prefer presumed (IA 1986 ss 239-240).

  • A The six-month period applies to unconnected persons; for connected persons it is two years. (right rule, wrong facts)
  • B Receiving value is relevant to transactions at an undervalue, not to preferences. (wrong rule)
  • C Repaying a genuine debt is not a transaction at an undervalue; the correct challenge is as a preference. (right rule, wrong facts)
  • E Because Petra is connected, the desire to prefer is presumed under s 239(6), so the burden is on her to rebut it. (wrong rule)

Source: Insolvency Act 1986, ss 239(4)-(6), 240(1)-(3), 249, 435

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