We have recently been involved with a claim where a director failed to take advice early enough to protect his position and has now been made bankrupt. As an insolvency practitioner, it is one of the most frustrating aspects of the job to see a director faced with the stress and worry of being made bankrupt when it could have been avoided.
As might be expected, the prospect of the company failing together with the potential consequences had not been properly considered.
The particular aspects of this case are not uncommon. The company rented its premises from one of the directors (also a shareholder). There is no question of there being any impropriety in the accounting treatment of the rental expense in the company (or the additional disclosures within the financial statements) nor the property income for the individual concerned.
Unfortunately, this relationship was never “formalised” prior to the company entering liquidation. As the allowance for the rental income was not taken into account, the appointed liquidator was able to request a higher repayment of monies owed (to the company) by the director.
One strand of the legal argument was that the director had been “preferred” in that they were being placed in a better position when compared to other unsecured creditors. This is in contravention of the Insolvency Act 1986. Furthermore, in the case of a “connected” party (in this case a director and shareholder of the company), the preference is “presumed” and the time period for a transaction is two years (rather than six months) ending with the onset of insolvency.
Had there been a formal lease agreement in place between the director (as owner of the premises) and the company, there would be no argument that monies were due to the director personally. Clearly, the rental value should be at an open market rate, ideally agreed by a suitably experienced professional.
Whilst we accept that a director may still fall foul of preference in this scenario, the quantum of any claim is likely to be reduced. In the event of a successful claim by a liquidator, this may be critical.
If you would like further information or to discuss these issues in more detail please contact Alastair Fish on firstname.lastname@example.org