MRL3701
Assignment 1
Semester 1
Due 2 March 2026
, Q1 What is an undue preference and what elements must be proved for a court to
set aside an undue preference?
An undue preference occurs when an insolvent debtor deliberately favours one creditor
above others at a time when the debtor knows that their estate is insolvent. The
purpose of this rule is to protect the principle of equality among creditors and to prevent
a debtor from choosing who gets paid when there is not enough money to satisfy all
debts.
Undue preferences are regulated by section 30 of the Insolvency Act 24 of 1936
(Meskin et al., 2019).
For a court to set aside a transaction as an undue preference, several elements must
be present.
The first requirement is that there must have been a disposition of property. A
disposition is interpreted widely and includes any act that diminishes the value of the
debtor’s estate. Payment of money to a creditor clearly qualifies as a disposition
because it reduces the assets available for distribution to other creditors (Bertelsmann
et al., 2021).
The second requirement is that the disposition must have been made at a time when
the debtor’s liabilities exceeded their assets. This means the debtor must have been
factually insolvent when the transaction took place. In the facts provided, Palesa’s
liabilities exceeded her assets by R1,8 million as early as 1 October 2025. This confirms
that she was already insolvent well before the payment to Andile on 31 January 2026.
The third requirement is that the disposition must have had the effect of preferring one
creditor above others. Preference exists when one creditor receives payment while
other creditors remain unpaid and are therefore placed in a worse position. In this case,
Andile received full payment of R900 000, while Lethabo’s debt of R1,1 million, which
was already due and payable, remained unpaid. This clearly resulted in unequal
treatment among creditors.
Assignment 1
Semester 1
Due 2 March 2026
, Q1 What is an undue preference and what elements must be proved for a court to
set aside an undue preference?
An undue preference occurs when an insolvent debtor deliberately favours one creditor
above others at a time when the debtor knows that their estate is insolvent. The
purpose of this rule is to protect the principle of equality among creditors and to prevent
a debtor from choosing who gets paid when there is not enough money to satisfy all
debts.
Undue preferences are regulated by section 30 of the Insolvency Act 24 of 1936
(Meskin et al., 2019).
For a court to set aside a transaction as an undue preference, several elements must
be present.
The first requirement is that there must have been a disposition of property. A
disposition is interpreted widely and includes any act that diminishes the value of the
debtor’s estate. Payment of money to a creditor clearly qualifies as a disposition
because it reduces the assets available for distribution to other creditors (Bertelsmann
et al., 2021).
The second requirement is that the disposition must have been made at a time when
the debtor’s liabilities exceeded their assets. This means the debtor must have been
factually insolvent when the transaction took place. In the facts provided, Palesa’s
liabilities exceeded her assets by R1,8 million as early as 1 October 2025. This confirms
that she was already insolvent well before the payment to Andile on 31 January 2026.
The third requirement is that the disposition must have had the effect of preferring one
creditor above others. Preference exists when one creditor receives payment while
other creditors remain unpaid and are therefore placed in a worse position. In this case,
Andile received full payment of R900 000, while Lethabo’s debt of R1,1 million, which
was already due and payable, remained unpaid. This clearly resulted in unequal
treatment among creditors.
