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Negative Balance sheet and Director Spending

What do I need to do?

Hi,

I am just completing the accounts for a ltd. It has a VERY negative balance sheet and the director has declared dividends during the year well in excess of the reserves (seeing as it is negative).

The company has a lot of liabilites - including factoring.

I have spoken with the director and raised these concerns and he is adamant that the company is still a going concern and actually it is applying for further credit.

So aside from the negative balance sheet note - divis in excess of distributions etc - director has completed documentation to assure us it is a going concern. What else do i need to do? Does an AML report need to be completed for the company with the suspicion that wrongful trading is taking place in that the director is supporting his lifestyle on credit of the company basically?

Should a seperate letter to HMRC be sent ? Or will notes within the full accounts suffice?

The dividend paperwork is in place and have been included in the bookkeeping - so these can't just be scrapped can they and will need to go on the directors tax return.

Any support would be great - thank you 

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17th Nov 2018 14:04

Presumably, the director is personally guaranteeing the debts. I would check it with him.

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17th Nov 2018 14:24

You just need to warn the client of the consequences for him of ever losing control of the company, and what steps he can take in future to improve those consequences. Best done in writing of course.

That is all.

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17th Nov 2018 14:52

A deficiency doesn't necessarily meet that the company isn't a going concern. However, the dividends seem to have been declared unlawfully and they could be required to be repaid by any competent liquidator.

You say that the director is adamant that the company is a going concern - does he just say that, end of debate, or is there some rationale that might be shared ?

More than likely, the director has his head in the sand and needs a wake up call.

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By frankfx
17th Nov 2018 15:29

Your thinking seems to have gone nuclear on this.

But you need to take steps to protect your position.

.
https://www.accountingweb.co.uk/any-answers/negative-balance-sheet-and-d...

May be worth looking at.... some relevance.

Are you ACCA?

Have a word with their tech team on this.

Helpful to speak with a professional , given the circumstances.

Does the director have prior form , in other companies perhaps

I have encountered directors who use company for lifestyle.

Insolvency specialists are familiar with these 'business personality types'

Director raising funds? Reality check.

Is this creditable given your description.

Letter of assurance regarding going concern... note you are protecting 12 months beyond the accounts signing date.

Is it worth the paper it is written on?

Can you think of where the he would source fresh funds .

Would the lenders want to see full accounts and projections ,prepared and supplied by you?

You need to protect your position.

You need consider to providing FORMAL written advice to client of the ongoing consequences

your final sentence
''illegal dividend can not just be scrapped can they''

You need to research this point a bit more deeply.

https://www.begbies-traynorgroup.com/articles/director-advice/unlawful-d...

I have used Begbies in the past.

If the amounts are significant and consequences serious.. you may want to ''formally'' advise the director to seek LEGAL advice.

Thanks (4)
17th Nov 2018 15:56

It'll be interesting to see if these applications for further credit are successful.

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18th Nov 2018 00:04

What are the underlying issues that have caused a negative balance sheet? Was it a loss on one large contact, in an otherwise profitable business?

Whatever the underlying problem, has it now been solved?

Is the situation worsening or are profits now being generated?

Perhaps it is a profitable company, but the director has been living beyond his means?

First you/he needs to nail down the issue. Your action should be dependent upon the cause of the problem.

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By DJKL
to Manchester_man
21st Nov 2018 10:30

What the OP did not say, but hinted at, is the company at a profits after tax level might well be profitable, the director "merely" declaring dividends beyond what ought to be declared and using company borrowing facilities for this purpose.

As such whilst on a break up basis the company is likely insolvent in reality large numbers of companies are insolvent on this basis, if profits are being generated the outlook , whilst not ideal, is slightly more positive.

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19th Nov 2018 12:08

You should read https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm15205. If the client director knew that there were no profits available for distribution when he decided to declare interim dividends, you may need to reclassify the (void) dividends he took as an overdrawn DLA, and account for tax under s455.

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21st Nov 2018 10:12

What if the company has ceased trading and the two directors (husband and wife) have split up. The wife took a large sum out of the company a year before she left, which was added to the DLA the previous year. Husband is willing to try and find the funds to replace the money but is out of work now, so what do we do if he can't manage it? S455 tax was paid last year - is there any way of him getting this back?

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to Homeworker
21st Nov 2018 11:09

Quote:

Absolutely. Simply repay the loan.

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21st Nov 2018 11:29

Just get KPMG to audit and review the accounts, unlikely they would find any going concern issues!!!
Company might want to consider changing it's name to Carillion Mark 2.

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21st Nov 2018 11:30

As an ACCA member and an Insolvency Practitioner I can agree with many of the previous comments. The ACCA guidance is to be found at

Home /Technical activities and advice/Technical resources/2010/October/Illegal dividends

If not a member this should still be available via the ACCA Global website.
Talking to an IP (whether me or a plc) won't add much to the equation at this stage, I'd say, however, I would agree that if this goes awry later someone like me will be knocking on doors and asking for the illegal dividends to be repaid - doesn't mean that they will be successful though!
Bon chance!

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By DJKL
to Peter Windatt
21st Nov 2018 11:44

Catch is you will only be involved if there is anything of value left in the company by the end of the process; the number of limited companies that evaporate because there is no money at the end within them to pay an IP is massive (or parties willing to sub their cost when it is all gone)

The irony being if one is to loot one's own small company make sure the looting is comprehensive.

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to DJKL
22nd Nov 2018 13:44

Sad but true, whether by design or otherwise.
That said, I was put in funds to review a matter a previous IP had sought to close, with over £200k unpaid on their clock, and managed to recover a 7 figure sum from the director for the benefit of creditors.
A rare beast but they do walk amongst us.

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By DJKL
to Peter Windatt
22nd Nov 2018 21:14

Personally I am coming round to the idea that forming a limited liability company ought to involve some form of insurance bond/deposit, held by the state, and only returnable if , at the end of the company's life, it is properly wound up with all creditors paid.

Thirty years ago I would have thought such a restraint unthinkable but thirty years ago I had not observed all the p*** taking performed behind limited liability protection.

Those that fail are then not per se barred from trying again but the front end sum they need to deposit increases on a sliding scale the more failed companies they leave in their wake.

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21st Nov 2018 12:13

Sounds as though this director is in denial. Paying down debt with more debt is very often a one way ticket to insolvency.

As a management accountant, I'd want to know in detail what the plan is to turn the company's fortunes around. A proper business plan would surely be a must.

In simple terms, a dividend is a division of profits. Therefore dividing non-existent "profits" sounds to me like the director is not acting responsibly as required to do by law. In an insolvency situation therefore, he might find himself in a spot of bother.

Always cover one's bases with clients. If you spot something that is unwise, or worse, make sure you warn the client, and advise a more prudent course. And record your advice just in case all goes belly up.

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21st Nov 2018 12:39

HMRC will say the dividends are illegal distributions and are a debt owed to the company by a shareholder with all the tax consequences that go with it.

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to tonyaustin
21st Nov 2018 12:48

Agreed. If you act as his Agent you should advise him that you will have to bring this to the attention of HMRC.

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21st Nov 2018 12:46

As the paying of a dividend except out of reserves is illegal you should report this to the relevant authorities which will include an AML report. Not doing so will put you at risk if you have a practice review by your supervising body.

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By NH
to Guilford Accounting
21st Nov 2018 12:54

Quote:

As the paying of a dividend except out of reserves is illegal you should report this to the relevant authorities which will include an AML report. Not doing so will put you at risk if you have a practice review by your supervising body.


Harsh! If the accounts show an overdrawn B/S and there are dividends paid in year, HMRC can pick that up themselves from the accounts if they like, what good will an AML report do? Reserves might have been available when the dividends were paid anyway.
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to NH
21st Nov 2018 12:58

That is not what the questioner said. The purpose of the AML report is to comply with the law - isn't that what they are for or can we choose which ones to comply with now?

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to Guilford Accounting
21st Nov 2018 13:04

Quote:

That is not what the questioner said. The purpose of the AML report is to comply with the law - isn't that what they are for or can we choose which ones to comply with now?

It's what it says on the tin - Anti Money Laundering. It doesn't cover all laws.

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By NH
to Guilford Accounting
21st Nov 2018 13:18

What makes you think this is an offence specifically under the Money Laundering legislation?

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to NH
21st Nov 2018 13:37

Take another example. An investor takes advantage of insider information and makes a gain on trading shares in the company. Is this reportable for AML purposes?

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By NH
to Guilford Accounting
21st Nov 2018 13:45

Uh?
An Apple is not a Pear, stick to the point of the original question

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to Guilford Accounting
21st Nov 2018 12:55

Is it illegal ? Or unlawful ?

Enter Portia, stage left.

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By DJKL
to lionofludesch
21st Nov 2018 13:24

I do not think she can at present, he/she may be indisposed; I believe Accounting Web has no "Quality of Mercy"

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to lionofludesch
21st Nov 2018 13:41

Both

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to Guilford Accounting
21st Nov 2018 14:31

Quote:

Both

Can't be. One's civil law, the other's criminal law.

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22nd Nov 2018 18:11

The important question is: has the client paid you?

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