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:
- 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.
- 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  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  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 email@example.com. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.