Directors who make loans to their companies often feel that they should stand first in line when it comes to repayment, especially when they regard the company as 'theirs'. The reality is that in English law, a company is a different legal person from its directors. This has significant implications for the way in which directors must conduct themselves.
A recent High Court case has underlined that directors take no priority over other creditors, and preferring their own interests will amount to a breach of duty.
The case involved an insulation installation company which once had an annual turnover of more than £14 million. It encountered acute cash flow problems and went into administration. In the four months preceding the appointment of the administrators, the company's principal director had repaid himself more than £530,000 from his director's loan account.
The company's administrators successfully argued that the company was both 'cash flow' insolvent (unable to meet its debts as they fell due) and 'balance sheet insolvent' (having a net deficiency of assets over liabilities) when those repayments were made.
The Court found that the director had breached his duty in preferring himself over other creditors and in seeking to better his position at their expense. In the circumstances, he was ordered to repay the money with interest.
Says Leanne Schneider-Rose,
Directors normally have no rights to payment of sums due to them over and above those due to any other creditor and have a duty to the creditors and the company to exercise their role responsibly and in accordance with the law.
If your business is in financial difficulties we can advise you of the appropriate actions to take.
If you would like help or assistance on this matter or other related insolvency matters, please contact Leanne Schneider-Rose on 
0121 698 2200 or email l.schneider-rose@sydneymitchell.co.uk.
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