Overdrawn Directors Loan Accounts and Preferences in an Insolvency

Frost Group's Insolvency Practitioner at our Croydon office Jeremy Frost and our Insolvency Practitioner in London, Patrick Wadsted were appointed Liquidators of a property services company. The business involved undertaking refurbishment of social housing.

The assets comprised debtors, sums due from the main contractors for whom our case had undertaken sub contract works.

We managed to establish a good relationship with the contractors and after some negotiation recovered almost 100% of the contract sums due with it being agreed that any deductions would come from the retentions.

During the course of our investigation into the failure we came across two instances of large sums of money being paid to individuals connected to the directors of the company in the period leading up to the liquidation. Some £60,000 was paid to the principal director’s father in law, to repay loans made when the business had been set up some two years prior to failure and a smaller amount to a “friend” who had helped pay the wages one week when cash was short. In both cases these sums were recovered by us as preferences.

This was not all. We also discovered that the directors had been paid mainly by way of dividend. All fine and well when profits are being generated. Not so good when the company had no distributable reserves (no retained profits) and so these dividend payments were recovered as well.

Word of caution therefore, when setting up arrangements to pay directors by way of dividend, monitor that profits are being made or the dividends will be recoverable in the event of failure.  

It is always best to talk to an Insolvency Practitioner as soon as your company shows the first signs of running into difficulty, we will give you honest and straight advice and make sure that you are aware of your obligations.  We will advise you throughout a formal insolvency process step by step and ensure that you don't break any rules.