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The dangers of making preferential payments to creditors and implications for directors

Preferential payments image

A preferential payment describes a situation where directors pay specific creditors to make them “better off” than other creditors. When the company eventually goes into insolvent liquidation the Court has power, upon the application of the liquidator, to force the beneficiary and/or the directors to pay the money back.

Firstly, however, the Court must judge whether it was the directors’ “desire” to create the preference, unless the beneficiary is connected to the company or its directors in which case desire is presumed by the Court.

Implications for directors

If it is proven that such a desire did exist, directors can face disqualification and may be liable to make a payment to the company at a level that the Court thinks fit.  It is important for directors to have up-to-date financial information and to document the motivation for making payments so they can minimise potential personal liability. The action required will depend on the company’s situation – if directors are uncertain we are able to give them clear and expert advice based on assessment of their individual circumstances.

For more information and advice about the liquidation process and how it may affect you,  take a look at our resources section or get in touch.

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