Unfair Preference of Creditors

Insolvency law can be confusing. Perhaps nowhere more so than when it comes to preference payments.

Preference payment claims are brought against the creditors who received such payments. But if you’re a company director, falling foul of the legislation can also see you end up in hot water.

That’s why, if your company is on the verge of insolvency, it’s sensible to take expert legal advice as soon as you can about what you can and can’t do and what you should be doing as a director.

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What is an Unfair Preference?

When a company is insolvent, it must treat all creditors equally. That means, before a company goes into formal insolvency, its directors are not allowed to pay or transfer assets to specific creditors in preference to others.

The key words here are “in preference”. Because it’s not just a question of a blanket ban on payments to creditors. It’s about giving special or more beneficial treatment to a particular creditor when others have an equal right to be repaid.

Examples of preferential transactions include:

  • Repaying a debt that a company director has secured with a personal guarantee
  • Repaying a loan to someone connected to the company, such as a family member or employee
  • Paying a key supplier to create goodwill for the directors in an ongoing relationship after insolvency

What are the potential consequences of unfair preference payments for directors?

If a liquidator believes there has been an unfair preference, they can bring proceedings against the creditor who received the payment/asset. But they may also decide to bring a claim against the company’s directors for Misfeasance.

If misfeasance is proven, you could be held liable for some or all of your company’s debts. You could also be at risk of disqualification as a director for between 2 and 15 years.

That’s why if your company is heading towards insolvency, you should seek specialist legal advice as soon as possible.

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