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Joshua
Joshua, Lawyer
Category: Bankruptcy Law
Satisfied Customers: 25427
Experience:  LL.B (Hons), Higher Prof. Dip. Law & Practice
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I made a loan for £20k to my husbands company to cover a short

Resolved Question:

I made a loan for £20k to my husband's company to cover a short term cash flow shortage. Once cash flow had improved the loan was repaid to me. About 18 months later on my wife had to put her company into administration due to a recent debt that could not be repaid. I have been contacted by the administrator and requested to pay back the loan that was repaid to me. When I questioned this the administrator said it fell within a 2 year time frame as it was less than 2 years since the loan was repaid to me it can be seen as giving preference to a creditor. Is this correct? I currently have no way to pay £20k to the administrator. Thank you.
Submitted: 3 years ago.
Category: Bankruptcy Law
Expert:  Joshua replied 3 years ago.

Joshua :

Hello and thank you for your question. I will be very pleased to assist you. I'm a practicing lawyer in England with over 10 years experience.

Joshua :

At the time the repayment of the debt was made, was the director (your spouse) aware that the company would be unable to pay its debts as a result of repaying the loan or otherwise was at risk of insolvency or was this not though to be the case at the time but only transpired later due to a bad debt you refer to?

Customer: Hi no at the time of the payment there was a dispute with a former employer. Later on the employee took my spouse's company to a et and won but this all happened after the loan had been repaid. There was a smaller loan repaid inbetween the time of the et and the verdict but still at this point the idea of administration was not about. In fact it was about a year after the verdict that the company went into administration as it was no longer hopeful it could paid the amount awarded in the et. Thanks
Joshua :

Thanks. In order to understand the position which at first can appear non sensical it is necessary for you to be aware of some legislation which underpins what the administrator is telling you:

Joshua :

Under the provisions of the Insolvency Act if a company within 6 months of insolvency can be shown to have repaid any debts so as to improve one creditors position disproportionateluy to another, then those repayments to the extent that they have disproportionately benefited those credits can be demanded back from the creditors to whom they were paid by the administrator. For connected persons to the company the time period is extended to two years...

Joshua :

The idea behind the law was to prevent directors arranging company affairs when they knew of impending insolvency so that one creditor benefits over another - obvious examples are directors repaying directors loans but not paying company bills or of course here, repaying a spouse but not paying other bills (I do not suggest this was the case - this is just an example of the sort of behaviour the law seeks to restrain).

Joshua :

In addition to the s239(6) of the Insolvency Act states that any connected person to a company is presumed to have been given preferential treatment unless that presumption can be rebutted.

Customer: Ok that makes sense. But surely it does not apply in circumstances where administration could not be foreseen ? The loans were repaid as things were going well at the time.
Joshua :

So to summarise the position is that based on the dates you provide the repayment can potentially be reclaimed and the burden of proof is upon you to show that you were not given preferential treatment in order to defend against such a claim by the administrator. How can you do this..?

Joshua :

The first thing you can turn to is any terms that were agreed as part of the loan. If the loan was to be repaid when it was or in deed should have been repaid before it was in fact repaid, then this would be a good starting point to refer to. i.e. you were not given preferential treatment - the loand was due or in deed overdue to be repaid at that time and the company was honouring its obligation.

Joshua :

If you can add to that by showing that at the time the loan was repaid it was not reasonably forseeable that the company was likely to become insolvent and certainly did not do so as a result of repayment of the loan this improves the position further. This is also good evidence in your favour on its own

Joshua :

If you can show one or both of these things then you have the makings of a good defence against the administrators claim. Whilst the administrator is essentially correct in what he is telling you what he is (quite unsuprisingly) likely not telling you is that the Insolvency Act does not say that any payment made to you in the two years before insolvency must be repaid under any circumstances. Rather it says it must be repaid unless you can show that you were not given preferential treatment as above.

Joshua :

Is there anything above I can clarify for you?

Customer: Thanks. That's very helpful.
Joshua :

A pleasure. I hope you are able to dig out some supportive evidence in your favour to revert to the administrator with.

Joshua :

If you have no further questions for now I should be very grateful if you would kindly take a moment to rate my service to you today. Your feedback is important to me. If there is anything else I can help with please reply back to me though.

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