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Preferring Creditors and Directors Loans (Normal Service Resumed)

Background

Regular readers may recall our briefing on the case of Leslie as Liquidator of 3G Design Engineering Ltd v White, which dealt with a short but interesting point on IP challenges to unfair preferences: the issue determined was whether repayment of a short term loan to a director shortly before insolvency (even if it had fallen due), was an unfair preference? The director had withdrawn £9,000 from the company bank account on the day he declared the company was insolvent. The director relied on the exception in terms of Section 243 (2(b)) of the 1986 Act arguing the transfer related to payment in cash for a debt which had become payable. Lord Malcolm reached an expected outcome in ruling the money should be repaid, but on an unexpected basis. He determined that the loan repayment had amounted to an unfair preference and could never have fallen within the statutory exception, while in our experience other judges may have decided that issue in the opposite direction.

Appeal

The director appealed (as a party litigant eventually) to the Inner House of the Court of Session. The court allowed his appeal. The director’s argument before the appeal court was again that the payment had been in the ordinary course of business – and that the company was required to repay the loan to him at the stage it did. The court concluded that in these circumstances it was possible that repayment of the loan by the company to the director could conceivably fall within the section 243 exception. The court therefore allowed the appeal and ordered an evidential proof to take place (at first instance decree had been granted simply on the basis of legal argument at what is known as a debate). It is therefore by no means certain that it will be concluded that repayment of the loan falls within the exception, but the appeal court has identified that it is a possibility, and the final decision will be a fact sensitive issue.

Advice

Clearly the issue of repayment of loans to connected parties, in the lead up to insolvency, will continue to require careful analysis and attention from IP’s in office. However, this case emphasises that it may not always be straightforward to claim that repayment to a director always amounts to a preference (although as previously identified there is a separate issue about whether it might amount to a breach of fiduciary duties of the director – an argument that for some reason that was not advanced in this particular case).

BBM Solicitors specialise in advising IP's in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal () or Alasdair Baijal (). This briefing note is current to 21 March 2013 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).

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