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Can director take money out of the company

Liquidation pending

Client (Ltd) with Sole Director has been in dispute with a customer and has lost the case and therefore owes the customer an awful lot of money (as well as legal fees) which they cannot afford to pay back and will have to liquidate.  They have appealed  against the decision which will be heard soon but likelihood of overturning the decision is slim. The company isn't quite insolvent yet and has become profitable recently

My client receives the usual £680 per month from the company.  There is no scope to pay dividends even though it is generating profits now.  He does want to take some money out of the company but obviously does not want to cause problems with the liquidators and creditors.  Can he increase his Salary to market rates ?  There is a small credit balance in his Directors Loan Account - can he take this out as well ?

Thank You

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16th Jan 2018 15:07

The Directors loan/current account is, presumably; unsecured, interest free and, repayable on demand?
I would be cautious are regards "material" changes, prior to what you say will be an inevitable liquidation.
This may be useful http://www.legislation.gov.uk/ukpga/1986/45/section/239

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16th Jan 2018 16:36

Thanks Chris

Yes Directors loan is unsecured, interest free and repayable on demand. Do you think this can be paid to him ?

Its a difficult one to gauge what is material and don't know if paying a salary commensurate to his position/market value is excessive. Though I agree a few months before the liquidation may raise eye brows. Furthermore, the liquidators would have to take legal action to force him to pay the money back which will be time consuming and costly .

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16th Jan 2018 17:55

Short answer = best not.

Read this article:
https://www.accountingweb.co.uk/any-answers/can-director-take-money-out-...

where it says:
"Directors of companies which become, or are likely to become, insolvent are under a duty to maximise the return for that company’s creditors.

If they are aware of any impending liabilities then they cannot deliberately take action that would cause the company's debts to increase or go unpaid (taking drawings as soon as the income hits the company bank account is a favourite)."

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16th Jan 2018 19:36

Thanks Jennifer. I think you had pasted the wrong link :-)

Yes agree on the loan but the salary increase could be justified. The insolvency is probable but not 100% certain and the business is continuing as before.

The director has said that he has made major cuts in the business recently to make it profitable and should be rewarded accordingly as well as being paid at market rate. He wants to be paid 4K a month. The company is generating around 20K Net profit each month.

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to JimLittle
17th Jan 2018 16:33

JimLittle wrote:

Thanks Jennifer. I think you had pasted the wrong link :-)

The company is generating around 20K Net profit each month.

How much is the debt? Can he agree with the customer to repay over a few months if it's a large amount (assuming he loses) Seems a shame to liquidate a profitable company otherwise.

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to legerman
17th Jan 2018 17:21

legerman wrote:

JimLittle wrote:

Thanks Jennifer. I think you had pasted the wrong link :-)

The company is generating around 20K Net profit each month.

How much is the debt?

Lower down they say that the debt is £10k: just tell them to wait 2 weeks!

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By mg200
17th Jan 2018 10:09

Once you account for the legal fees and the debt to the customer, is the company insolvent?

You say that the company is not insolvent yet so I presume not. However you also say that the company cannot afford to repay this debt without liquidating which suggests to me that they are insolvent when you prepare the accounts on a break up basis?

At the end of the day, can the director say retrospectively that they protected the creditors interests as much as their own? I see the point that the director should be paid his/her market value as have all the other creditors who were presumably paid at market value however the process of increasing a salary doesn't look great when you have effectively admitted that the company is insolvent.

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17th Jan 2018 11:26

I say the company is not insolvent since they are appealing against the court decision there is a chance albeit a very small one they could still win.

Yes the salary increase does not look good and will be questioned but maybe can be justified and anyway in the light of other matters I will be surprised if the liquidators pursued the director through the courts for around 10K

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By LJCASE
18th Jan 2018 20:57

Here's the link to the article Jennifer wanted you to see and quoted from.
https://www.accountingweb.co.uk/practice/general-practice/get-the-detail...
>> Buying the right to recover debts

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01st Feb 2018 20:54

HI there, I am an IP and I can help with this.

Your client is in a grey area and should proceed with caution!

When considering the company's insolvency, you should take into account contingent liabilities, and so even if the appeal is not final, it still sounds as if they expect there will be a liability and your post that suggests that would make the company insolvent. Therefore the directors should act in the best interests of creditors.

Therefore, there is the risk that
- any repayment of a loan account credit will be seen as a preference payment (S239 Insolvency Act 1986);
- any increase in salary (or bonus) may also be challenged by a liquidator as misfeasance (S212 IA86).

Agree with your later comment that this is costly and time consuming for a liquidator.

If the company is not insolvent (even if the appeal is lost) and the company is making £20k profit a month and the debt is only £10k, then they are in safer territory and in all likelihood they can give themselves a salary and carry on - but there is of course risk attached if the company dies fall into liquidation.

A liquidator can look back 2 years prior to liquidation for certain transactions.

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By DJKL
to Jamie Playford
01st Feb 2018 21:23

But generally they only will if there is a reasonable chance his/her fees will be paid. Sad fact of life that unless you are a football club or very high profile business, most instances of directors "looting" companies are not investigated.

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