A common question directors of an insolvent company ask is along the lines of can I pay a particular creditor in full before the company is wound up?  Usually, that creditor is related or associated in some way to the director, or there may be a personal guarantee attached to the debt.

 

 

In short, the answer is invariably “No” as that may constitute a preference.  As a quick point, a preference is where, “The company does anything or suffers anything to be done” and that action puts the creditor in a better position than creditors as a whole.

 

The key principles surrounding a preference are:

 

1. Where the benefitting creditor is not associated in any way then it is for the liquidator to prove there was a desire to place a creditor in a better position.  If the party is connected in any manner, then desire is presumed, unless it can be rebutted.

 

2. Did the giving of the preference render the company insolvent or was the company already insolvent?

 

These key principles were tested in two separate court cases this year, with differing outcomes arising based upon the individual facts.

 

In the first of these, Carton-Kelly -v- Darty [2022] EWHC 2873 (Ch) the repayment of an intra-company debt of £115 million was deemed a preference.  The defence primarily swung on the argument the company was balance sheet solvent, mainly as a result of a material deferred tax asset.  However, the court disagreed as these allowances were only available if future profits were to arise and, given the company had ceased trading, that prospect was never going occur.

 

In upholding the liquidator’s claim the court cited, “the purpose of [the preference provisions] is to prevent a company defeating or undermining the pari passu principle.” [sic].  In other words, you must ensure creditors as a whole are treated fairly and equally.

 

The second case was Manolete Partners PLC -v- Coleman and Ors [2022] EWCH 2644 (Ch) where the court took a differing view.  Mr Coleman had repaid his loan account and argued a sale of the business had been agreed where the combination of sale proceeds and debtor receipts would have paid all known creditors.  Insolvent liquidation was never contemplated.  Indeed, the only criticism against his defence was the fact he paid himself in full immediately, whereas other creditors would need to wait until sufficient funds were received.

 

As it happens, liabilities were substantially higher than Mr Coleman understood to be the case and the company was insolvent.

 

In considering the facts, the court accepted Mr Coleman’s genuine belief all creditors would be paid in full and the presumption of “Desire” had been rebutted.  Accordingly, the case against him was dismissed.

 

The message we can take from these two cases is whether a transaction is a preference, or not, will very much depend on all surrounding facts at the time.

 

If you require any advice or assistance on any insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to enquiries@pbcbusinessrecovery.co.uk.  Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

 

In our recent blog entitled “What is it you want to do?” (https://www.pbcbusinessrecovery.co.uk/what-is-it-you-want-to-do/), we outlined how PBC ensure anybody receiving advice is presented with all the options available to them.

 

In a recent case, PBC were approached by two directors who were being pursued by the liquidator of their company in relation to loans due from associated companies of £1.4million.  After taking time to understand the overall picture, we corresponded with the liquidator, making an informed  offer of £300,000 payable over three years with no personal guarantees or other security being needed.  This offer was accepted.

 

In another example, PBC acted for an individual who owned various properties, some of which had been sold, leaving a shortfall of over £200,000 owed to the mortgage company.  The individual also owned further mortgaged properties with  the same mortgagee and was he looking for a solution which avoided an insolvency outcome.  Following negotiations with the solicitors acting for the mortgagee, a settlement below £100,000 was agreed.

 

In both cases, formal insolvency procedures were avoided which secured mutually suitable outcomes.  The headwinds from the Courts are that mediation is a necessary process and indeed one which may become compulsory and as can be seen from the examples above, one which can provide successful resolution to matters.

 

If you require advice or assistance on any insolvency-related issue or with mediation, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

American General George Patton once said “Do not try to make circumstances fit your plans. Make plans that fit the circumstances.”

 

Where companies are concerned it is often overlooked that behind a company and title of director is a human, with feelings, concerns and often, a family to support.  That company is their source of domestic income or, more deeply, it is their “Baby”, their life or a family generational entity where personal emotions often prevail.

 

A question we at PBC always ask directors and individuals surrounds what their ideal solution to the challenges they are facing is.  Often the reaction is one of surprise as they have either assumed the options are limited or they have simply not thought beyond the traumas they are experiencing at the time.

 

At PBC we cannot think of anything worse than someone adopting one option, only to find there was a better alternative that suited the circumstances.  Should I look at an individual voluntary arrangement or go bankrupt?  Should I place my company into liquidation when one of the restructuring and turnaround options are available?  Questions we help you to determine the answers to.

 

It is accepted, circumstances can dictate/restrict the options available.  One of those is simply one of not taking advice at an early stage.  Equally, a director could say they have simply had enough of running the business and want to get out in the quickest manner.  Regardless of the circumstances, we are of the opinion following your ideal path (where possible) is far more appropriate than simply looking at the perceived way forward.  In other words, you make your plans to fit the circumstances.

 

If you require advice or assistance on any insolvency-related issue or with mediation, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to enquiries@pbcbusinessrecovery.co.uk.  Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.