Preference Transaction Avoidance in Ghana: Has the Liquidator's burden changed?

• Author: Samuel Adarkwah
• Date: 01 March 2019
• Published date: 01 March 2019
• DOI: http://doi.org/10.1002/iir.1326

RESEARCH ARTICLE

Preference Transaction Avoidance in Ghana:

Has the Liquidator's burden changed?

Samuel Adarkwah

Kwame Nkrumah University of Science

and Technology, Kumasi, Ghana

Correspondence

Samuel Adarkwah, Kwame Nkrumah

University of Science and Technology,

Kumasi, Ghana.

Email: sba48@cornell.edu

Abstract

Financially distressed companies sometimes conceive

plans to pay off certain creditors before petitioning

the Court for winding up. This last‐minute payment

referred to as a preference transaction puts the pre-

ferred creditor in a better position than the rest of the

company's creditors because the distressed company

may not have enough assets to satisfy everyone. Insol-

vency law frowns on such last‐minute transactions

and provides the Liquidator with the power to avoid

these transactions, to restore the asset to the company

and distribute it to all the creditors. Preference avoid-

ance forms an integral part of the corporate insolvency

law in Ghana. These principles founded upon the com-

mon law of England are now provided for under the

Bodies Corporate (Official) Liquidation Act 1963

(Act 180) of Ghana. This essay discusses preference

avoidance under Ghanaian law. It also examines a

recent judicial application of the law and finally suggest

avenues for reform.

1|INTRODUCTION

When a company reaches the point of imminent collapse due to insolvency, it may conceive

plans to repay some creditors before filing a petition for winding up. These creditors may have

contributed significantly to the company during its productive days or perhaps may have

pressured the company to satisfy its debt obligation due to their foreknowledge of the

impending collapse. Because the company is insolvent and does not have enough assets to

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© 2019 INSOL International and John Wiley & Sons, Ltd

Received: 19 July 2017 Revised: 18 April 2018 Accepted: 5 February 2019

DOI: 10.1002/iir.1326

Int Insolv Rev. 2019;28:5–21. wileyonlinelibrary.com/journal/iir 5

satisfy every creditor, beneficiaries of the last‐minute transfer of cash or other assets stand to

gain than the rest of the company's creditors who may be left unpaid.

Insolvency law frowns on preference transaction made prior to the filing of the winding up

petition. The reason is not far‐fetched. Insolvency law devices compulsory collective proceedings

for the resolution of the debtor's financial distress. The success of this procedure depends on the

ability of the Liquidator to gather the debtor's assets to pay off all the creditors. If the debtor can

dissipate the assets in favour of some creditors on the twilight of the filing for winding up peti-

tion, there will be nothing left for the other unsuspecting creditors to fall on. Such transaction

defeats a cardinal principle of insolvency law, which is the equitable distribution of the debtor's

assets to all similarly situated creditors.

1

To address the incidence of preference transfers, insolvency law empowers the Liquidator or

Trustee to challenge such last‐minute transfer of the company's property, to avoid the transac-

tion, and to restore the asset to the company's estate for the benefit of all the creditors.

The principles underpinning preference transaction avoidance form an essential part of

corporate insolvency law in Ghana. The Bodies Corporate (Official Liquidations) Act 1963

(Act 180) (“BCOLA”) has given effect to these principles, which were mainly passed on from

the common law of England.

This article discusses preference transaction avoidance under the BCOLA. It also examines a

decision of the High Court, which suggests a fundamental change to the Liquidator's burden of

proof in avoidance transaction under the BCOLA.

2

The aim is to set out clearly the principles

that deal with avoidance of preference transactions and critically analyse the recent judicial pro-

nouncement. The goal of this article is to influence or guide future judicial or other construction

of the statute and to recommend needed reform.

2|PREFERENCE TRANSACTION

Generally speaking, a preference transaction is “a payment of money or transfer of property

made by a debtor to a creditor on the eve of the debtor's bankruptcy that is for a larger amount

than the creditor would recover in a bankruptcy distribution.”

3

English law provided tools for

the avoidance of preference transactions. The principles were first formulated at common law

and later passed into legislation.

4

The law

1

Goode notes that “It is this principle of rateable distribution which marks off the rights of creditors in a winding

up from their pre‐liquidation entitlements.”See Roy Goode, Principles of Corporate Insolvency Law (2nd edn, Sweet &

Maxwell 1997) 142. It must be noted, however, that there are many exceptions to the principle of rateable distribution

rule or as it is popularly called the pari passu rule. Some authors argue that, in practice, the principle is less important

than it is made out to be. See Rizwaan Mokal, Corporate Insolvency Law: Theory and Application (OUP 2005) 94.

2

The Liquidator v Joseph Karam & 2 Others, Suit No. Acc/12/09 (“Karam”). This case was heard before the Commercial

Division of the High Court of Justice in Accra presided over by Justice Richard Adjei‐Frimpong. Decided on April 18,

2012, it is one of the few judicial decisions on preference transaction law in Ghana. It, however, appears to distort the

position of the law under the BCOLA. This article attempts to clearly set out the position of the law to guide futurecon-

struction of the statute.

3

Anthony Duggan et al., Canadian Bankruptcy and Insolvency Law, Cases, Text and Materials (3rd edn, Emond Mont-

gomery Publications 2015) 245.

4

Andrew Keay, “Transactional Avoidance: Critical Aspects of English and Australian Law”(2000) 9 Int. Insolv. Rev.5–36;

The Case of the Bankrupts (1592) 2 Co Rep 25; 76 ER 441; Worseley v Demattos (1758) 1 Burr 467; 97 ER 407.

6ADARKWAH