It is hardly surprising that directors of companies that face insolvency often wish to recoup their investments before the balloon goes up. However, as one High Court case concerning a failed furniture retailer showed, they are not entitled to give their own financial interests precedence over those of other creditors.

The company was estimated to owe almost £300,000 to creditors when it was wound up. A few months before it went into liquidation, a woman who had previously been its sole director arranged to buy the entirety of its trading stock for £620,000. The purchase price was ostensibly satisfied in full by being offset against her outstanding director’s loan account.

After the company’s liquidator launched proceedings under the Insolvency Act 1986, the Court found that the business’s financial position was deteriorating rapidly at the time of the transaction and that it was by then insolvent because it had liabilities that exceeded its assets. Although the woman had resigned as a director before the transaction was executed, she was still in office when it was arranged.

The Court found that the woman was not a secured creditor and that she had been unlawfully preferred over other creditors in that the transaction had extinguished the debt that the company owed her. The stock that she acquired was also worth more than the balance of her loan account and, even taking into account a cash payment she had later made to the company, the transaction had been carried out at an undervalue.