Directors liability:

This was fraudulent preference and the bank must repay the sums received. The directors' liability under their guarantee to the bank then revived.

A payment made or charge created under threat of legal proceedings is not voluntary and so it cannot be treated as fraudulent preference even though its purpose and effect is to treat one creditor more favorable than the rest.

An ordinary commercial payment of debts made without intention of giving an advance may not amount to fraudulent preference: Re Paraguassu Steam Tramway Co (1974). However, it has recently been held that a payment will constitute a fraudulent preference if the debtor, at the time of making it, knew that he could not pay his debts as they arose and intended to pay one of his creditors in full ahead of the others.

Case: RE MATHEWS (1982)

The proprietors of an insolvent small company (who were aware of the insolvency) paid cheques into the company's bank account. Two days later the company ceased trading and two days after that the proprietors notified the bank of the termination of their personal guarantees of the company's borrowing.

Held:

Banking cheques after a decision to stop trading was a fraudulent preference in favour of the bank since at that time the proprietors knew that the other creditors would not be paid (even though they honestly believed that they would eventually be paid).