MRL3701
Assignment 1
Semester 1
Due 2 March 2026
, Question 1
What is an undue preference, and what elements must be proved for a
court to set aside an undue preference?
An undue preference arises in insolvency law when an insolvent debtor, shortly before
sequestration, deliberately prefers one creditor over others in a way that disturbs the
principle of equal treatment of creditors. The law intervenes because insolvency is a
collective process, and no single creditor should be favoured at the expense of the
general body of creditors (Sharrock et al., 2023).
In South African law, undue preferences are regulated by section 30 of the Insolvency
Act 24 of 1936.
An undue preference exists where a debtor, while insolvent, makes a disposition that
has the effect of preferring one creditor above others, and where the debtor intended to
do so.
For a court to set aside an undue preference, the following elements must be proved:
First, there must have been a disposition of property by the debtor. A disposition is
interpreted broadly and includes any act by which property is transferred or payment is
made. Payment of money to a creditor clearly falls within this definition (Insolvency Act
24 of 1936, s 2).
Second, the disposition must have been made at a time when the debtor’s liabilities
exceeded her assets. This means the debtor must have been factually insolvent at the
time of the disposition. In this case, Palesa’s liabilities exceeded her assets by R1,8
million as early as 1 October 2025, well before January 2026, which indicates factual
insolvency.
Third, the disposition must have had the effect of preferring one creditor above
others. This occurs when one creditor receives payment or security, thereby reducing
the pool of assets available to the remaining creditors. Paying one creditor in full while
others remain unpaid satisfies this requirement.
Assignment 1
Semester 1
Due 2 March 2026
, Question 1
What is an undue preference, and what elements must be proved for a
court to set aside an undue preference?
An undue preference arises in insolvency law when an insolvent debtor, shortly before
sequestration, deliberately prefers one creditor over others in a way that disturbs the
principle of equal treatment of creditors. The law intervenes because insolvency is a
collective process, and no single creditor should be favoured at the expense of the
general body of creditors (Sharrock et al., 2023).
In South African law, undue preferences are regulated by section 30 of the Insolvency
Act 24 of 1936.
An undue preference exists where a debtor, while insolvent, makes a disposition that
has the effect of preferring one creditor above others, and where the debtor intended to
do so.
For a court to set aside an undue preference, the following elements must be proved:
First, there must have been a disposition of property by the debtor. A disposition is
interpreted broadly and includes any act by which property is transferred or payment is
made. Payment of money to a creditor clearly falls within this definition (Insolvency Act
24 of 1936, s 2).
Second, the disposition must have been made at a time when the debtor’s liabilities
exceeded her assets. This means the debtor must have been factually insolvent at the
time of the disposition. In this case, Palesa’s liabilities exceeded her assets by R1,8
million as early as 1 October 2025, well before January 2026, which indicates factual
insolvency.
Third, the disposition must have had the effect of preferring one creditor above
others. This occurs when one creditor receives payment or security, thereby reducing
the pool of assets available to the remaining creditors. Paying one creditor in full while
others remain unpaid satisfies this requirement.
