Confused by legal advice when director left company...

Confused by legal advice when director left...

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Hi,

Client had 5 directors, all invested £2,500 each. One director left, and the company's lawyer advised that he should pay £4,000 into the company as the time of leaving.

No monies have been put in by the other directors.

Does anyone know of potential reasons why the lawyer advised him to do this?

A confused Murphy?

Thanks

Replies (10)

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By bernard michael bayly
16th Mar 2011 10:41

Confused Murphy

Was the company making losses at the time he left and £4000 represented the equivalent of his proportion of the losses/ deficit on the balance sheet.

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By andypartridge
16th Mar 2011 10:59

?

Overdrawn director's account?

-- Kind regards Andy

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By murphy1
16th Mar 2011 12:49

Seems like it..

Bernard,

 

It is the first year of trading and while thay have no accounts etc at the moment, they haven't had many sales, so seems like that is the explanation.

 

Another question now though, I may seem thick, but I haven't come across this before - how do I account for the entry - at the moment the loan will be around £6,500 and if there are losses, I cannot declare a dividend?

 

What is the correct procedure?

Thanks again,

 

Murphy

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By zebaa
16th Mar 2011 13:47

UNlimited company

Is this an unlimited company then? Since when do directors have any liabilaty for company losses in a limited conpany. Has there been any personal undertakings given? Very odd. Time to find out more Murphy,

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By Monsoon
16th Mar 2011 14:43

?

I'm with Zebaa, I'm not sure why you'd need to pay money in to cover losses, unless there was a specific agreement in place.

The most logical explanation is the Directors Loan Account was overdrawn and the £4000 would repay it. Whether this is right or not is another matter!

Another question now though, I may seem thick, but I haven't come across this before - how do I account for the entry - at the moment the loan will be around £6,500 and if there are losses, I cannot declare a dividend?

 Posted by murphy1 on Wed, 16/03/2011 - 12:49

Dividends don't come into it - as I read it, the director is paying money to the company, not the other way round. If it's a simple answer, then the balance on the DLA will be £4000 Dr, and he will pay £4000 (Cr DLA, Dr Bank), clearing it down to zero. If the payment of £4000 leaves a balance on his DLA, you will need to know what this payment represented in order to know how to treat it/ the remaining DLA balance.

If you find out the reasoning, I'd be interested to know what it was for.

 

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By Monsoon
16th Mar 2011 14:45

?

Aweb lag = double post, sorry!

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By murphy1
16th Mar 2011 17:04

Monsoon..

thanks.

 

Company is limited, Director Loan balance is in CREDIT, other directors do not know what it was paid for, just that the lawyer told the leaving director to make payment!

Thanks,

 

Murphy

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By frustratedwithhmrc
16th Mar 2011 18:03

Whose running the company, the directors or the lawyer?

Sounds like whoever is acting as MD should get a written confirmation from the lawyer as to what the money is for and under what circumstances it is to be claimed by the company or repaid.

All sounds a bit dubious.

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By NewACA
24th Mar 2011 20:16

Us or the Lawyer?

Surely the right person to ask is the lawyer rather than a forum!

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By Mildred
24th Mar 2011 22:33

No need for guess work.

 

 Am I missing something here? The ‘legal advice’ would have been communicated in writing stating clearly the reason for his/her advice which will enable you to determine the appropriate accounting treatment. Review relevant/applicable correspondence or advise client to write to the lawyer requesting for the above info.

Millie(mink finance professionals)

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