Every business needs to manage its cash flow carefully, and many business owners will have first-hand experience of times when a business’s finances are not flowing as they would like. During tricky times, it is essential that directors are transparent and careful with the order and priority in which payments are made.
When might preference payments occur?
If a business falls on financially difficult ground and there isn’t the money to pay everyone that is owed, it’s imperative that directors are aware that they must not prioritise paying themselves, family members or any other personal connections before other creditors. These would be known as preference payments.
According to experts at Practical Law acting in this way would be a serious mistake, because it could either mean that other creditors are waiting longer for their payment, or worse, they don’t receive it at all because the money has already been spent.
Examples of preference payments
There are a number of ways by which a director could inadvertently pay themselves before paying their creditors and in this way make a preference payment. It may be that they repay an overdraft which is covered by a directors personal guarantee, thereby prioritising their own financial situation over that of others. It may be making a payment to a supplier with whom they have an informal agreement to do future business, should this business not work out.
What are the implications?
The implications of making a preference payment are potentially quite severe. The money may need to be returned by the beneficiary and in serious cases, defendants can be barred from company directorship for a finite period. If in any doubt at all, seek legal advice from experts such as Parachute Law who can analyse the situation objectively and offer advice.
In summary, business owners and directors should always ensure that creditors are paid in the order that they are due, rather than paying anyone with a personal connection to the business first. This is definitely something that business owners or directors ought to be aware of and avoid doing.