Seven Key Differences Between Preferences And The Creditor Duty
The following are seven points of difference between Preferences and the Creditor Duty.
When a company is in financial trouble it has to consider its creditors. If it fails to do so properly then there can be consequences for the Directors and even other parties.
These seven points of difference between Preference payments and the Creditor Duty were highlighted by Lord Reed in the decision in the matter of BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25 when that case was heard by the Supreme Court.
Point In Time
The point in time at which the relevant duties arise differ where Preferences and the Creditor Duty apply. Director’s duties sometimes referred to as fiduciary duties, apply at all times, but there is a change if they are modified by the Creditor Duty when the company is bordering on insolvency or an insolvent Liquidation or Administration is probable. It, therefore, applies in that modified way before the time when Preferences under Section 239 of the Insolvency Act 1986 might become relevant, ie the transaction in question must have occurred within a specified two year period before the commencement of insolvency proceedings.
The Company’s Insolvency Position
A Preference transaction applies only when the company is insolvent at the time of the transaction or as a consequence of it. However, the Creditor Duty can arise in broader circumstances of imminent insolvency as opposed to actual insolvency.
Difference In The Duties
The duties in respect of Preferences and the Creditor Duty are not the same. The circumstances where Preferences apply are more restrictive because the company must have been influenced in giving the preference by a desire to prefer the recipient. The difference is that Director’s duties when the Creditor Duty is triggered are to act in the best interests of the company generally. The fact that one creditor is paid in preference to others, at a time when the company is insolvent or bordering on insolvency, will not be a breach of fiduciary duty if the directors believe in good faith that they are acting in the interests of the company in accordance with the Creditor Duty, because they have decided on that basis that it is in the company’s interests to continue trading, and therefore need to pay particular creditors.
Remedies Available
The remedies for a breach of the Creditor Duty are different: on the one hand, the wide range of remedies available for the breach of the Creditor Duty, whereas in the case of a Preference the remedy is designed to restore the company’s position to what it would have been if the preference had not been given.
Circumstances Of The Action
Legal proceedings due to Preference payments can only be brought under Section 239 of the Insolvency Act 1986 in the event that the company is wound up. There is no such restriction on the bringing of proceedings for breach of fiduciary duty.
Who Can Bring The Legal Action
The range of persons who can bring proceedings for a breach of fiduciary duty extends beyond the Liquidator. Breach of the Creditor Duty may give rise to a remedy at the instance of the company itself, or its assignee, or a shareholder, or a creditor or contributory making an application under Section 212 of the Insolvency Act 1986, or a Liquidator or Administrator. A Preference action can only be brought by a Liquidator or Administrator.
Person Against Whom An Action Could Be Brought
Proceedings under Preferences pursuant to Section 239 of the Insolvency Act 1986 can only be brought against the recipient of a Preference whereas legal action that can be brought for a breach of fiduciary duty is potentially available against a wider range of persons, including knowing recipients of payments made in breach of the duty.
