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Payments to Director of Insolvent Company Not Fraudulent Preference

September 9, 2016

A declaration sought by theLiquidator of an insolvent company that certain payments made to a directorconstituted fraudulent preference has been refused by the High Court in FFCouriers Limited & Companies Acts: Keane -v- Day & ors IEHC

The Liquidator alleged that thepayments to the director were drawings to him in his capacity as a creditor ofthe company where the director had advanced a loan to the company. TheLiquidator asserted that this was a preferential repayment of the director’sloan to the company in priority to other creditors. However, the directorclaimed that he did not know the payments were being accounted as a repaymentof the director’s loan and that he had always believed the payments amounted tohis monthly salary.

The Court recognised that thedirector was a ‘connected party’ to the insolvent company and therefore theonus of proof was on the director to rebut the assertion of a fraudulentpreference. However the Court was satisfied that the payments were not madewith a view to preferring the director, as a creditor, over other creditors ofthe company. The Court held that the payments received (which were modestamounts) represented payments of a monthly salary to the director rather than arepayment of a loan and accepted the director’s evidence in this regard. TheCourt held that the presumption of fraudulent preference had been rebutted andrefused to grant the declaration sought.

With the Court stating that: “acareful application of the sometimes quite draconian provisions of our companylaw code is required if company directors are not to lose their goodname“; this case clearly demonstrates again the challenges thatliquidators face in successfully prosecuting fraudulent preference claims andthat every case will turn on the very specific facts in eachinstance.

Contributed by Craig Sowman

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