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Insolvency – Shareholders’ Interests ‘Preferred’ Over Those of Other Creditors

When a company falls into insolvency, unsecured creditors have little choice but to wait in line to be paid. However, as a High Court ruling underlined, they are all entitled to be treated equally – and that includes shareholders and directors.

The case concerned an interior design company that traded only briefly. The month before it commenced creditors’ voluntary liquidation, £315,750 of its money was paid to another business. All but £50 of that sum was remitted onwards the following day to the company’s two shareholders, one of whom was its sole director. The company was left with only about £20,000 in its bank account.

There was no dispute that the company owed the shareholders at least the sums they received. The company and its liquidator, however, launched proceedings against them under Section 239 of the Insolvency Act 1986 on the basis that they had received preferential treatment when compared with the company’s other unsecured creditors.

Upholding the claim, the Court found that the sole director was well aware when the payment was made that the company was insolvent in that it had insufficient assets to meet its debts. He had no belief that he and his fellow shareholder were secured creditors. The Court also found that, by authorising the payment, he had failed in his duty as a director to promote the success of the company.

Although there was no allegation of dishonesty on his part, the Court found that he had failed to act reasonably. To the extent that the interests of other unsecured creditors were considered at all, it was solely in the context of ensuring that the shareholders were paid ahead of them. Restorative orders were made against both shareholders, requiring them to repay to the company the entirety of the sums they received, plus interest.

Published in
11 March 2022
Last Updated
8 February 2023