Making Commercial Law: Essays in Honour of Roy Goode

By Royston Miles Goode; Ross Cranston | Go to book overview

19
Some Observations on the Law Relating To Preferences

D. D. PRENTICE


A. Introduction

Creditors of a debtor1 are under no obligation to look after the interests of their fellow creditors. A creditor is entitled to pursue its own economic selfinterest and in a situation where the debtor has more than one creditor (the norm rather than the exception), the race goes to the swiftest. Although a debtor has an obligation to seek out its creditor, inevitably when a debtor is in financial difficulties, it will repay its debts in a strategic manner, since, if it wishes to survive, it will not be in its interests to adopt an even-handed approach in effecting repayment of its debts. Survival dictates that the importunate creditor, creditors threatening liquidation, or those with a commercial stranglehold over a company's affairs,2 will be repaid before their passive, dilatory, or commercially weak brethren. There is nothing legally wrong in pursuing this policy of survival and indeed if the strategy succeeds it will probably be for the benefit of all creditors since at the end of the day they will be repaid.3 But once the debtor goes into insolvent liquidation, the picture changes and the law precludes the debtor from diluting the pool of assets available for creditors by paying off the debts of a selected creditor or a selected group of creditors.

Where a company encounters financial difficulties, the initiatives that can be pursued to protect the interests of certain selected creditors can take various forms. For example, immediate payment, the granting of security, the obtaining of a third party guarantee.4 All these forms have the same

____________________
1
This essay will deal only with corporate debtors and it will also be assumed (unless otherwise stated) that the creditors are corporate.
2
See, for example, Leyland DAF Ltd v. Automotive Products Plc [ 1994] 1 BCLC245 (supplier of vital component refusing to continue to supply unless outstanding account satisfied). The power of monopoly utility suppliers has been curbed but only after the company has gone into some form of insolvency proceeding: see Insolvency Act 1986, s. 233 ( IA 1986).
3
Unsecured creditors will suffer where they have not bargained for the payment of interest on overdue debts: see generally Late Payment of Bills -- A Consultative Document ( DTI, January 1993); Late Payment Of Commercial Debt -- A Consultative Document ( DTI, November 1993); Tackling Late Payment: Stating Payment Policies In The Directors' Report ( DTI, February 1995 and June 1996).
4
See IA 1986, s. 241.

-439-

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