Some Observations on the Law Relating To Preferences
D. D. PRENTICE
Creditors of a debtor1 are under no obligation to look after the interests of their fellow creditors. A creditor is entitled to pursue its own economic selfinterest and in a situation where the debtor has more than one creditor (the norm rather than the exception), the race goes to the swiftest. Although a debtor has an obligation to seek out its creditor, inevitably when a debtor is in financial difficulties, it will repay its debts in a strategic manner, since, if it wishes to survive, it will not be in its interests to adopt an even-handed approach in effecting repayment of its debts. Survival dictates that the importunate creditor, creditors threatening liquidation, or those with a commercial stranglehold over a company's affairs,2 will be repaid before their passive, dilatory, or commercially weak brethren. There is nothing legally wrong in pursuing this policy of survival and indeed if the strategy succeeds it will probably be for the benefit of all creditors since at the end of the day they will be repaid.3 But once the debtor goes into insolvent liquidation, the picture changes and the law precludes the debtor from diluting the pool of assets available for creditors by paying off the debts of a selected creditor or a selected group of creditors.
Where a company encounters financial difficulties, the initiatives that can be pursued to protect the interests of certain selected creditors can take various forms. For example, immediate payment, the granting of security, the obtaining of a third party guarantee.4 All these forms have the same____________________