Q&As

A company director directs that the company’s debtors pay to him directly the debts due to the company. Where the debtors do so, does that operate to discharge the debtors’ obligations to the company, or can a subsequently-appointed administrator of the company pursue those debtors who would then in effect be paying twice? Do the debtors have any potential defence?

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Published on LexisPSL on 01/06/2017

The following Restructuring & Insolvency Q&A provides comprehensive and up to date legal information covering:

  • A company director directs that the company’s debtors pay to him directly the debts due to the company. Where the debtors do so, does that operate to discharge the debtors’ obligations to the company, or can a subsequently-appointed administrator of the company pursue those debtors who would then in effect be paying twice? Do the debtors have any potential defence?

In answering this Q&A, we have made the following assumptions:

  1. the debts in question were ordinary business trade debts due to the company

  2. the debts had not been assigned by the company to the director, whether expressly or impliedly

  3. the director’s direction, and payment of the debts to him, occurred prior to the company entering into administration

Further, as you appear to have disregarded any claim(s) against the director, we make no reference to any such potential claim(s).

The starting point is that the debts were contractually due to the company and therefore formed part of the company’s assets—accordingly the company could (subject to its articles and putting to one side any future challenge in insolvency) have directed that its debtors pay the debts due to a third party. In that case, was the company bound by the director’s direction such that the company would now, for example, be estopped from seeking to recover the debts from the debtors?

The position vis-à-vis the company and the director is a separate issue. In connection with the company’s dealings with third parties, section 40(1) of the Companies Act 2006 (CA 2006) is relevant and provides:

‘(1) In favour of a person dealing with a company in good faith, the power of the d

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