Does Repayment Of A Director’s Loan Account Result In A Better Position For An Insolvency Preference?

Does repayment of a director’s loan account result in a better position for an insolvency preference for the relevant director as a creditor? You would have thought so but along came Manolete Partners PLC v Howarth (Re One Legal Services Ltd) [2025] EWHC 2294 (Ch) (“Howarth”) to curdle the soup. Ordinarily it will probably do so but there will always be exceptions.

A barrister’s buffet is seemingly now fuelled with an additional dish: ‘my Lord, the director has not been put into a better position; they have received monies against their loans instead of salary…’. 

That was the crux of Howarth.

Howarth is far from a standard case. The facts are rather unique in the context of a preference claim, leaving aside the Administrator’s cross examination whilst on vacation, the result of which it seems, pleased neither the judge nor the Administrator. 

A striking feature of this case is that the respondent as a litigant in person overcame Manolete – the well known litigation and claims purchasing company.

Director Loan Account Insolvency Preference

Ordinarily when a director vacuums up an insolvent company’s valuable funds, this is offset through a reduction to their director’s loan account.

There is usually a consistency about the resulting preference such that once the arithmetic has been flushed through a spreadsheet; the director’s primary gateway to freedom from liability in defending a preference claim is likely restricted to rebuttal of the desire to prefer.

The reduction in the director’s loan account usually firmly shuts the door to fleshing out a better position defence. In fact more commonly it facilitates a liquidator’s better position offence!

Better Position Defence

The director, Mr Howarth of the company, which had gone into a Company Voluntary Arrangement (“CVA”) was advised by the former Administrator to take his salary entitlements, not through the payroll but instead take similar payments against his director’s loan account. The payments during the CVA amounted to £101,000 before the company collapsed into Administration.

The rationale for this was the tax savings for the company  in relation to PAYE/NIC. The court said this did not produce a better position for Mr Howarth:

… the Applicant has failed to establish that the Company did anything or suffered anything to be done which had the effect of putting the Respondent into a position which, in the event of the Company going into insolvent liquidation, would be better than the position he would have been in if that thing had not been done: s239(4)(b). That is to say: no ‘preference in fact’ has been made out on the evidence. Whilst the Respondent received repayments of his director’s loan over the period April to December 2019, that was in place of his salary. He was not better off as a result of the salary/loan swap arrangement.

Better Position On The Balance Sheet?

The guardians of double entry might need to consider how to fit this into the balance sheet.

If there was a salary, the entitlement to it would result in a credit being applied to the director’s loan account and a corresponding payment. One would net off against the other and the director’s loan account would remain unchanged. However, in this case, it seems that no credit for the salary entitlement would have applied and therefore the balance owing to the director, Mr Howarth, would have reduced. If indeed that is what happened, it suggests the director would be owed less money than he would have been owed had the payments not been made to him. 

Rebuttal Of The Desire To Prefer

It is perhaps noteworthy the judge did provide for an alternative to exclusive reliance upon the better position defence:

Even if the salary/loan swap arrangement had satisfied the ‘preference in fact’ requirements of s239(4)(b), in my judgment the preference claim would still fail. On the evidence which I have heard and read, the presumption of a desire to prefer is plainly rebutted.

On the evidence which I have heard and read, I am satisfied that in making the Payments, the Company, acting by its directing mind the Respondent, was not influenced by a desire to put the Respondent into a position which, in the event of the Company going into insolvent liquidation, would be better than the position he would have been in if that thing had not been done. In putting the salary/loan swap arrangement in place and thereafter effecting the Payments pursuant to such arrangement, the Company acting by the Respondent simply wished to save the Company the PAYE and NIC that would otherwise have been payable on the Respondent’s salary. I so find.

Howarth might perhaps present little temptation for an appeal. The so-called ‘better position‘ defence may furnish something for the pedantic to nibble at, but surveying the facts in their entirety, it is more likely to summon a Nelsonian squint than any appetite for further scrutiny.