14 December 2018: When a company is in a formal insolvency process, such as a liquidation or administration, the directors could be criticised for allowing certain transactions to take place in the period leading up to the liquidation. For example, a payment to a connected creditor, within 2 years of the liquidation, at the time when the company was insolvent, could be deemed to be a preference payment. For a preference to be recoverable by an office holder, there must have been a desire to place the creditor in a better position (in the event of the company’s insolvency) than they would have been in, had the payment not been made. This “desire” is presumed where the creditor is connected to the company, however, the presumption can be rebutted with appropriate evidence.
In the recent case of Abdulali v Finnegan & another, the liquidator unsuccessfully relied on the presumption of desire. On appeal, the court found that the director had, in fact, been influenced by the desire to inject fresh lending into the company and facilitate a rescue, rather than by a desire to prefer one creditor over others. The court held that even if the belief that the company could be rescued was uncommercial, or overly optimistic, it did not amount to the requisite improper desire that allows for a preference payment to be recovered.
What does this mean for the director of a potentially insolvent company? Well firstly, it is important they fully understand the company’s financial position before taking the decision to repay one creditor over others, particularly where that creditor is connected to the company. Where the repayment facilitates fresh lending, which is subsequently injected into the company, used to reduce other liabilities or spent generating new business, this should be discussed at board level and recorded appropriately. Such information and documents must be delivered to an office holder in the event of a formal insolvency.
The company’s records should help the office holder to understand the rationale for making certain payments and ultimately determine whether the director was influenced by a desire to turn around the company’s fortunes. Where there is evidence that the director was influenced to make the repayment as part of a wider attempt to rescue the company, such a payment will be more difficult to attack.
If you or your client would like to discuss the possible implications of making particular payments, or if you have any insolvency query, please contact any one of our experienced management team.