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tdlawyer
tdlawyer, Lawyer
Category: Bankruptcy Law
Satisfied Customers: 1096
Experience:  Lawyer with 11 years experience in bankruptcy related issues.
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Hi. If a company has 20k equity, 60k directors loans and 40k

Customer Question

Hi. If a company has 20k equity, 60k directors loans and 40k debt. The debt is not preferential or secured.
The company is trading ok and can always meet short term liabilities.
If the company were considering winding up, collected debt from debtors, sold stock and repaid company loan. The company then sold assets but in fire sale only got 10k. Am I correct in saying all £10k would go to the debtor? The company is a ltd co. What are the implications for the directors?
Submitted: 2 years ago.
Category: Bankruptcy Law
Expert:  tdlawyer replied 2 years ago.

tdlawyer :

Hello, welcome to the website. My name is Tony, I can assist you with this.

tdlawyer :

The realisation from the asset sale would be distributed amongst the creditors by reference to the amount the company owed them.

tdlawyer :

This is a pari passu distribution.

tdlawyer :

The money goes to all creditors, and the directors are also creditors, as the company owes them money by virtue of the loan.

tdlawyer :

They are, I assume, unsecured, and hence treated like anybody else.

Customer : Yes, but if the directors loans were paid before company was wound up from cash in the company would that be an issue? Also if the debt to outstanding creditors was not met in full would there be any liability on the directors? Would directors have any personal judgement against them? Would they be barred from being a director in future?
tdlawyer :

It could be an issue, yes, it might be that this is considered a "preference" under the Insolvency Act 1986. If the payment is made within two years of the onset of insolvency, then it could be challenged and set aside.

tdlawyer :

So this could result in a claim against the directors to get the money back into the company, which in turn, could result in a judgment against them, yes.

tdlawyer :

Also, their conduct would be considered and the liquidator potentially would file an adverse report, which could result in potential disqualification.

tdlawyer :

It might be worth you having a look at this on preferences: http://www.insolvencydirect.bis.gov.uk/technicalmanual/Ch25-36/Chapter31/part4A/Part%202/Part%202.htm

Customer : So you can't treat debtors with preference. Does age, size terms of debt infer a preference?
tdlawyer :

No, not really. The key thing, with directors, is that they are connected parties, and the law assumes a desire to prefer them because of their position. In other words, it's logical they would want to pay themselves ahead of others, and the law assumes that to be be the case unless the directors can show otherwise (very hard).

Customer : So all debt regardless of age, size and conditions attached should be treated as pari passu?
tdlawyer :

D's are not normally liable for their company's debts.

tdlawyer :

Debts are usually treated pari pass, yes.

tdlawyer :

But, IF the directors are paid back ahead of everybody else within 2 years from the onset of insolvency, the risk that payment being considered a preference by a court. It might be challenged by a liquidator or creditor etc.

tdlawyer :

Yes.

tdlawyer :

Unless it's secured.

tdlawyer :

Can I ask if you're happy with the service this evening please?

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