I have a corporate client that is making considerable losses but the director still takes his salary without fail, several thousand a month.
The creditors list is nearly £40k now and the staff are constantly fighting them off and making excuses for the company.
I suppose my question is, if the company is in a dire financial position, shouldn't the director be the first one to 'suffer' as opposed to the creditors?
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Replies (8)
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Directors responsibility
To put it bluntly ..... he should be reminded of his responsibilities, and paying the creditors should be high on his list. He should not continue trading if the company is unable to pay it's creditors.
Is he trying to pay off his overdrawn DLA before the company goes bust? Is he paying the PAYE/NI to HMRC?
Is he also the only shareholder or is he just a hired hack in which case he's entitled to his salary as much as the rest of the staff I endorse the measures suggested above. He should talk to an IP
Google 'wrongful trading' or 'trading whilst insolvent'
A director that allows the company under his/her management to continue trading whilst insolvent is potentially open to personal liability and being disqualified as a director.
As suggested above, the director should speak to an Insolvency Practitioner.
... more information...
... he is the sole director but joint shareholder, if that helps?
Drop in the ocean
The number of directors who get prosecuted for wrongful trading is minimal, those that get sent to jail is even less.
So the guy is drawing a salary, seems fine to me. If he had been taking out big bonuses, running up a huge overdrawn balance on his DLA then that may be a different matter.
£40k of creditors is not enough to get him in serious trouble.
However it is worth sitting down with him, explaining where the business is going wrong and implementing a strategy to improve the position. If there really is no way out I recommend that you and he meet a friendly insolvency practitioner. Its far better that if the business has to go into administration, that he is control of the situation i.e. he appoints the administrator rather than a creditor serving a winding up order and he gets a court appointed administrator (not good) or one appointed by the bank (again not good).
I was in a previous life Group FD of a £100m turnover construction group which went into administration around 6 months after I left. I spent month trying to convince the Main Board Directors (and shareholders) to put the main trading company into administration (it was trading insolvently), they ignored me so I left.
Now there was (in my opinion) a case to answer on wrongful trading there but no one got so much as a slap on the wrist.
Agree with Kent Accountant
I've seen this sort of thing a few times. Certainly cover your back by warning (and keep warning!) the director of the consequences of wrongful / insolvent trading and the possibility of a personal liability notice if national insurance on the payroll has been underpaid over a period of time.
However, like Kent Accountant says, sadly it's rare for directors to be held to account where the sums of money are relatively small - a few tens of thousands is relatively small.
99 out of a 100 insolvency practitioners when they are appointed just want to wrap the case up with the least amount of hassle. There's not much money in it for them in trying to launch a crusade against the former director.
Trading while insolvent
In summary:
1. The directors have duties re Wrongful Trading, Fraudulent Trading and Misfeasance.
2. The creditors could petition for liquidation, andf then ask the liquidator to seek and order for compensation based on WT etc. Of course as a matter of fact the creditor must show that the company is insolvent - no reasonable prospect of meeting its obligations etc.