Points deduction poll

Quote: martinwildbull "Adey, sorry to bother you again, but is it not the case that during a "hiatus period" prior to insolvency, you are not supposed to prefer any ordinary creditor over another, and would a director personally settling debts of the limited company amount to that? '"

To your first point, essentially, yes. To your second point, I'd suspect no - but with a slighly lower degree of assurance.

As a director of a company, once you know (or ought to know) that it is unable to settle its debts as they fall due, then there are a string of specific requirements you MUST comply with, to avoid the offence of wrongful trading, by trading whilst insolvent. One of those requirements (put simply) is that you must not prefer (i.e. pay/settle) one creditor in preference to another. To do so, without a compelling commercial reason necessary to minimise the loss to the body of creditors, is what is called a "fraudulent preference". Any such payments are liable to be recoverable from the recipient by the administrator or liquidator. Also, note that trading whilst insolvent effectively lifts the protection of limited liability, in that any director so doing can become personally liable for debts of the company.

Prefering a creditor by the COMPANY, without compelling justification, is clearly a no-no. Should a director - or, maybe more to the point, a principal shareholder, chose to settle a debt of the company personally, you start getting into grey areas. I guess technically, the director then effectively stands in place of the original creditor, through an increased loan account creditor, and therefore the quantum of creditors remains unchanged. Just its composition has changed.

If you are wondering whether, if OK paid any debts of the company personally, and if by doing so was guilty of making a fraudulent preference, based on the above I'd say probably not. But, to be safe, you'd need an insolvency lawyer to opine on the particular circumstances.

Following FA's comments earlier, it may well be that some of the debt OK claims as due to him arose precisely BECAUSE he argues that he paid, personally, liabilities of the company. As long as he paid these while the company was solvent, there can hardly be an issue anyway, regardless?

The administrator, in his "proposals" report, alludes to some monies being paid BACK to OK, reducing his loan account. teh administrator goes on to say that he would investigate these seeming repayments, to ascertain whether the constitued a pruadulent preference. As indeed he has a responsibility anyway to do. Separate issue to your point, though.

I know we don't need to worry about anyone who finds this thread boring (or does not understand it's contents) complaining. Since they can have no reason whatsoever for reading it in the first place, knowing its nature and contents.