I've just been brought in to bring the accounts up to date and put them onto a proper accounts package (have put them on Xero). It's been a mess, I've now got it tidy. In doing so, I've unearthed creditors that need to be paid (including PAYE I think) and until a large debtor settles there isn't anything to pay them with.
Creditors are now chasing on a daily basis. The director however is continuing to draw his salary from the dwindling cash reserves. Could he be criticised for this in the event of insolvency? Should I be telling him to stop taking money out? It is salary, not dividends.
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Yes you should...
... you need to cover yourself. Bring s 212 of the Insolvency Act 1986 to his attention (preferably in writing)...
The Insolvency Act 1986 allows proceedings to be brought against the company’s directors if they knew or ought to have known that the company was insolvent or the company was trading fraudulently with intent to defraud creditors. The directors may be ordered to make such contribution to the company’s assets as the Court thinks fit.
... from article 'Directors Duties - Get the details right' - link is here
https://www.accountingweb.co.uk/topic/tax/directors-duties-get-details-right/499863
Plus ...
A liquidator will look back over two years from the date of appointment, scrutinise the directors actions both before and during the liquidation process and if found to have failed the creditors interests or be deemed to be incorrect could be required to answer claims of breach of duty, wrongdoing or fraudulent trading.
...from article Directors Duties for companies in difficulty...the content of this article might be of help
https://www.accountingweb.co.uk/article/directors%E2%80%99-duties-companies-difficulty/526675
Director's salary
For what it's worth I'd say that, provided he continues to draw the same regular salary, he should be ok. He is presumably working for it and it is a company expense, like anything else, and only if he drew out a large sum would it warrant scrutiny if it comes to insolvency.
Postscript: JAA's posting was simultaneous to mine so I didn't see it before - I agree with his comments but the question is whether the company actually is insolvent ? Maybe if the large debtor pays it would all be hunky-dory ?
Look again
For what it's worth I'd say that, provided he continues to draw the same regular salary, he should be ok. He is presumably working for it and it is a company expense, like anything else, and only if he drew out a large sum would it warrant scrutiny if it comes to insolvency.
Postscript: JAA's posting was simultaneous to mine so I didn't see it before - I agree with his comments but the question is whether the company actually is insolvent ? Maybe if the large debtor pays it would all be hunky-dory ?
I'm pretty certain that JAA is female.
Debtor
“until a large debtor settles there isn't anything to pay them with”.
Are they actually insolvent, or is this merely a cash flow problem? The answer would seem to lie in the “large debtor”. Is this enough to clear the immediate creditors? Is this debtor likely to pay, or is it in effect a bad debt?
That seems to be where the answer lies as to what action you should take.
Your role
Hi Sarah, what is your role, are you the bookkeeper or the accountant.
If you consider the business to be genuinely insolvent you need to have that conversation with your client, advise him of his duties as a director and suggest that you and he meet an insolvency practitioner who can offer some advice, The first meeting should be free.
If you're in the South East I can recommend some IP's to you.
As Already Said Above
It seems to all hang on the perfomance of the debtor.
If the Debtor pays it would seem that everything would be squared up.
if they dont they become insolvant and then its time for the IP
incidentally do they have any other work on going or are all their eggs
in 1 basket with the "large debtor"
Potential insolvency
Wise words of advice as usual.
The two things to do in any situation where insolvency is suspected are:
Advise client to consult with an Insolvency Practitioner.Make sure you get paid!
An IP is best placed to advise in any situation where there is any suspicion of insolvency - the taking of insolvency advice also protects the company and its directors.