The Preference Trap?

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My most recent blog on the Chancellor’s support schemes  (available here) included comments on the Bounce Back Loan scheme.  One question I have received following that blog focussed on how using the funds from the loan to pay off debts personally guaranteed by the director would be treated (as the Bounce Back Loan scheme does not involve any personal guarantee) and I thought I would take the opportunity to explain the situation.


The Insolvency Act 1986 states “a company gives a preference to a person if that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or liabilities and the company does anything…..[which puts] that person which, in the event of the company going into insolvent liquidation, will be better than the position he would have been if that thing had not been done”.


So let’s unpick that legal jargon for a moment by revisiting the scenario.  The director was a guarantor for a company debt.  The company did something which put the director in a better position – by paying off the debt which had been guaranteed and removing the potential for the creditor to call on the guarantee.


However, that is not the whole situation.  The liquidator has to prove three things:


  1. The transaction took place at a relevant time. As the director is a connected party, the transaction must have taken place in the two years prior to the liquidation.


  1. The company must have had the desire to prefer the individual who received the preferential treatment. As the director is a connected party, this desire is presumed (but can be rebutted by the director).


  1. The company was insolvent at the time of the transaction or as a result of the transaction. Clearly, this fact is subjective on the facts of each individual case.


Let’s return to our scenario.  Could the company have taken out a bounce back loan to repay other business borrowing (whether or not guaranteed) to take advantage of the low interest rates on the Bounce Back Loan versus their existing borrowing?  Therefore, the director may argue that the desire was not there as they were seeking to improve the cash-flow of the business, but that argument would be stronger if contemporaneous notes (something I strongly advise) were made explaining the thinking behind the transactions, particularly as such transactions may be challenged several years later.


As previously stated, each scenario will depend on its own facts.  Should you be worried about your position or you have another insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to or access our website at


Legal Claims Against Directors following Liquidation – What you need to know. – Guest blog post from Steven Mather Solicitor

This is a guest blog post from Steven Mather Solicitor – The Right Lawyer for You and Your Business™


Firstly, thanks to Gary and Jamie and everyone at PBC for inviting me to guest blog on their website. I’ve worked with them a number of times and I’m impressed by how well they know their stuff, but also the commercial and pragmatic approach they take.

I’m a commercial solicitor based in Leicester and over the last 10+ years I’ve acted on both sides of insolvency disputes – acting for insolvency practitioners like PBC as well as acting for Directors personally trying to defend the claims.

When I talk about insolvency claims, the main ones that I see frequently are:

  • Misfeasance
  • Antecedent transactions
  • Directors Loan account recovery

Misfeasance claims are quite rare, but in them an Insolvency Practitioner (IP) will seek to recover funds from directors personally where they have committed some serious misfeasance which has harmed or damaged the business.

One thing I’ve realised in all the cases I’ve dealt with is that in many small businesses, the director is the shareholder and so they think they can do what they please when they please. I mean, that’s a benefit of being self-employed, right?! Anyway, what most directors do not realise is that the Company is its own living breathing (almost) legal entity and that as director they have duties (called ‘fiduciary’ duties) many of which are also set down in statute, which they owe to the Company. When a company goes into liquidation, it is the IP who then make the decisions on behalf of the Company, and so if the Company has suffered loss, the Company doesn’t care that you, the director, was “a good mate and we go back years”. The company is entitled to take action against the director to recover its loss.

Unlawful and Wrongful Trading are two other types of claims that can be brought against Directors and is aimed at pinning liability on directors where they ought to have known the business was insolvent.

Antecedent Transactions are very common.  These claims seek the reversal of payments made/received by the Company prior to the liquidation which were either:

  • At an undervalue – e.g. selling a Lorry for £1000 when it was worth £65,000
  • A Preference – paying a mate or director before making payments to other creditors.

Both types of claims are quite easy to succeed on acting for IP’s. All that needs to be showed is that the payments were made/received and there was a detriment to the Company/Creditors.

If you’re a director, knowing your back is against the wall, your best bet is not to try to bail out but speak to experts like PBC to get solid advice on the best steps for the Company.


Directors Loan Account claims

Most businesses operate directors loan accounts. If the director has to put some money in to support the business, their DLA will be in credit and that’s not a problem.

However, they are also used to extract money out of a business in a way which is not payroll/salary or dividends. Sometimes, it might even be unwittingly used, as accountants allocate certain expenditure of the business to the director’s loan account. Most of the time though, having an overdrawn loan account is because the directors kept taking money out of the business when there was not enough profit properly to declare a dividend at the end of the year.

The result is an overdrawn loan account. If you enter liquidation with an overdrawn loan account, you can rest assured that the IP will be asking you to repay it.

So what, as a director, should you do if you are faced with a claim in relation to your directors’ loan account? There’s actually very little you can do to dispute it. As they generally feature in the company’s accounts, which the directors sign, the Courts will say that “ignorance” of how its made up is not a defence. You might be able to argue that some of the debits against the DLA were not personal expenses and were legitimate business expenses or expenses incurred in your carrying out your role as director, but that requires a more forensic analysis of the account entries.

In short, your best option is to speak frankly with the IP and seek to reach an agreement on a repayment figure and potential repayment plan. Most IP’s are savvy enough to realise that many directors are broke by the time their company goes into liquidation, so doing what you can financially will usually make them go away.

Insolvency Claims are complex though and my best advice would be for any director facing any type of claim to speak to an independent and experienced insolvency litigation solicitor.



About the Author

Steven Mather is a Commercial & Business Solicitor based in Leicester. He has helped thousands of clients with legal issues worth millions of pounds. He is experienced, approachable and recommended. You can check out his website at

Leopards do need to change their spots

It is a common phrase but if a leopard does not change its spots then it remains a leopard. Probably the most recent example of that has been British Home Stores who did not keep up with shopping trends.

Now another big name has fell into difficulty with Toys R Us in the United States falling into Chapter 11. For those who are unaware, Chapter 11 of the US Bankruptcy Code is similar to administration in this Country.  It must be emphasised this latest news involves the American division and neither the UK, European, Australian or Asian operations are caught under the current issues.

The (chapter 11) process is being used to enable the company to restructure approximately $5billion of debt, aided by a reported $3billion of new financing. The issue I would be asking about is more of a practical one.  Recent statistics suggest buying habits for toys are changing with estimates indicating 2016 saw 13.7% of toys being acquired on-line, as compared to 6.5% the previous year.  You have to question whether the large warehouse-style outlet is becoming a dinosaur when compared to the laptop in the home.

Whenever we at PBC look at a corporate restructure we first look at trying to identify what are the reasons for the company experiencing difficulties. After all, a leopard that does not change its spots will only endure a reoccurrence of those issues at a later date.  Toys R US say all 1,600 stores and 64,000 employees in America will be preserved, yet retail has seen the on-line competition bite into their business by another 7%in 2016.  I may be guilty of being too simplistic but often at PBC we find it is the simple things that are over-looked and, in the end come back and bite you.

If you require any advice or assistance on any insolvency-related matter then please contact Gary Pettit or Gavin Bates at PBC Business Recovery & Insolvency on (01604) 212150.