Fraudulent Preference [Section 531]

Fraudulent Preference [Section 531]
The expression 'fraudulent preference' may be described to mean the giving of an improper benefit to a few in preference to others, leading to inequality between them [Official Liquidator Vs. Victonj Hire Purchasing Co. (Pvt.) Ltd. [1982] 52 Compo Cas. 88].
The term 'fraudulent preference' has been borrowed from the law of insolvency. According to that law, any transfer of property or payment made by a person who is unable to pay his debts in favour of a creditor with a view to giving him a preference over other creditors is regarded as fraudulent preference. If within three months an insolvency petition is presented against him and he is adjudicated insolvent, the transaction becomes invalid. As per Section 531(1), any such transaction entered into by a company within six months before the commencement of its winding-up is deemed as a fraudulent preference of its creditors and accordingly invalid.
In Re, M. Kushler Ltd. [1943] 2 Ch. D 248, K and his wife were the sole directors and shareholders of a company. The company's overdraft with th~ bank was guaranteed by K. On coming to know that the company was unab1e to pay its debts, payments were made between 12th May and 21st May into the Bank at the instance of K to extinguish the overdraft. On May 23 resolution for the winding-up of the company was passed. No payment to creditors was made between May 10 and May 23. Held, there was fraudulent preference.
To establish a case of fraudulent preference under Section 531, two conditions
must be satisfied:
(a) that the transaction took place within six months before the commencement
of the winding-up; and
(b) that the dominant motive in the mind of the company acting through its
directors was to prefer one creditor in preference to other creditors [Sharp Vs.
Jackson (1889) A.c. 19].
Thus, to prove fraudulent preference it shall have to be established that the dominant motive was to commit an act of dishonesty. However, there is no fraudulent preference, if the transaction is not voluntary. For instance, where a company makes payment to a creditor under pressure of litigation or attachment of its properties, it cannot be regarded as a fraudulent preference [Official Liquidator. Vs. Vel1kataraman [1966] 1 Compo L.J. 243]. Similarly, there is no fraudulent preference when a debtor's dominant motive is to benefit himself rather than to confer an advantage on the creditor [Re, F.L.E. Holdings Ltd. [1976] 1 WLR 1409].
Avoidance of Voluntary Transfer (Section 531A)
The same principles which apply in respect of avoidance of voluntary transfer in the case of an insolvent apply in the case of an application made under Section 531A for the avoidance of a voluntary transfer made by a company which goes into liquidation [Sunder Lnl Jain Vs. Sandeep Paper Mills (Pvt.) Ltd. [1987] 60 Compo Cas 87 (Delhi)].
According to Section 531A, any transfer of property, movable or immovable, or any delivery of goods, made by a company within a period of one year before the commencement of its winding-up shall be void against the liquidator. But, the following transactions are not covered by this rule: