What, if anything, would you be saying to this client?

What, if anything, would you be saying to this...

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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.  

Replies (11)

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Jennifer Adams
By Jennifer Adams
26th Mar 2013 10:58

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 

 

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By Eddystone
26th Mar 2013 11:06

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 ?

 

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Replying to carnmores:
By petersaxton
26th Mar 2013 17:09

Look again

Eddystone wrote:

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.

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By D.Frow
26th Mar 2013 11:07

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.

 

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By Sarah P
26th Mar 2013 11:12

The debtor will pay, hopefully within the next week and it will be enough to pay all the immediate creditors.  It is a cashflow issue at the moment, they are not insolvent.  I suppose I'm just concerned that it will get out of hand, I wouldn't like to be running my own business this way.  But then that's why I've been brought in - to help them get a grip on the cash.

Thanks for all your comments, very helpful.

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Man of Kent
By Kent accountant
26th Mar 2013 11:27

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.

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By Sarah P
26th Mar 2013 11:37

My role

I am accountant but on a short-term project to bring the books up to date, which his administrator will then be able to manage going forward (hopefully).

I'm up North but thanks for the offer :-) I know a few IPs but I don't think we're there at the moment.

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Glenn Martin
By Glenn Martin
26th Mar 2013 12:46

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"

 

 

 

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By Sarah P
26th Mar 2013 16:52

Work pattern

They have a few small contracts where they make a very small margin and then get their profits from the occasional large contract (of which this 'large debtor' is one).  The small ones don't cover overheads.  This large one should (note, should) see them straight.  If this large one wasn't coming in then I would be having strong words.  

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By Les Hodgson
26th Mar 2013 18:02

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.

 

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By Sarah P
27th Mar 2013 08:03

Wise words as usual

Indeed.  Thank you all for all your thoughts, it has helped clear my mind.

I'm not concerned about being paid.  I work for a few connected companies and they collectively will see me right!

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