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
Replies (11)
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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
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)."
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.
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!
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.
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
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.
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.