Knowledge Release

The current economic conditions present challenges to all businesses and company directors need to be aware that if their business fails there can be circumstances that lead to transactions being reversed by a Liquidator or Administrator which can have significant consequences.

Gerald Irwin of Sutton Coldfield-based Licensed Insolvency Practitioners and Business Advisers, Irwin Insolvency said “that with the onset of insolvency, the rules change which can alter the effect of a seemingly quite innocent transaction which leads to the question, what is preference? A preference occurs when a business carries out any transaction that puts one creditor in a better position than others. An example of this could be simply paying on credit either in full or part whilst other creditors remain unpaid”.

“A transaction will only be deemed to be a preference if the business was ‘influenced by a desire’ to put a creditor in a better position so a transaction made for a proper commercial reason is unlikely to fall within this provision. However, if the transaction is with a connected person rather than the business then it is presumed to have been influenced by a desire to put the creditor in a better position”, Mr. Irwin continued.

A connected person includes directors, shadow directors and their associates. A Liquidator or Administrator will, therefore, look carefully at transactions that benefit directors.

“After a business has become insolvent, the director is running the risk that he may be called upon to repay any such preferential payments. The important point here is an awareness of this pitfall whilst monitoring the financial position of the business carefully,” concluded Mr. Irwin.