Question about legality of a Director's actions

Unagreed extractions from company bank account

Didn't find your answer?

I have a question about the legality of actions by a client, who is a co-director of a limited company.

BACKGROUND - . Both directors are 50% shareholders. Director A is the PSC. He also wears another hat; that of owner of the business premises – a public house. Director A’s wife is on the payroll also. For the past 7 years they have operated the public house business as a limited company. In due course, the regrettably usual discord between directors occurred, and much rancour occurred.

EVENT #1 - Late last year Director B was diagnosed with Parkinson’s disease and mobility issues, and had to stop work for a while. He is still off work undergoing medical treatment. Director A wanted him to receive SSP like a minor employee, but Director B opted to take out £170 a week as he felt he was entitled to it.

EVENT #2 - Director A (wearing his hat of landlord) took the step of doubling the £550 monthly rent to £1,100 without consultation with his co-director, and in breach of the lease. Director B didn’t find out about this for 6 months, at which point he took an amount from the company bank account equivalent to 6 months improperly-increased rent less an amount equal to the rate of inflation. He properly notified Director A of his action.

EVENT #3 – Director A then took an amount in excess of £11,000 from the bank account, stating that it represented extra pay for his wife and himself for the previous 6 months while Director B was off sick. Director A did not notify Director B about his action. Instead, he notified the company’s accountant (me) at a time when the accountant (me) was waiting to be wheeled into the operating theatre for a 90-minute operation, and Director B continued to air grievances about his co-director despite being aware of the impending surgery. It was only 11.30am, but Director A seemed to be intoxicated.

EVENT #4 – Director B became aware of Director A’s action a fortnight later, at which point he rang the latter to ask on what grounds he took the £11,000. For the most part, only verbal abuse ensued, Director A challenging him to take him to Court as ‘he had more money that him’, and threatening to bankrupt the business. A few days later he was reported to have told people that he had ‘sacked’ Director B and that Director B had no more to do with the business.

MY QUESTION IS THIS

Putting aside Director A’s treatment of Director B after he was diagnosed with Parkinsons, and putting aside his disrespectful behaviour to the company’s accountant (me) after he had been informed I was about to have surgery, I am concerned about the legal aspects of his actions when it comes to the affairs of the company. Whilst EVENT #2 could possibly be construed as a civil matter – although it was money improperly taken from the company, I am curious as to whether EVENT #3 could constitute a criminal act by Director A.

Any input on this would be appreciated.

Replies (19)

Please login or register to join the discussion.

avatar
By paul.benny
06th Jul 2022 06:13

(a) This is almost entirely a legal question. As I'm sure you know
(b) Is there a shareholders' agreement? Absent that, none of the removals of funds are obviously unlawful - although clearly PAYE should be accounted for on 'salary', if indeed that is what it is
(c) Your surgery is of no relevance. Sorry
(d) Don't get involved in someone else's dispute
(e) Who is your client? Company, Director A, Director B? Be clear who are and aren't acting for.

I'm sure it's helped to set this out. But your job (subject to your engagement letter) is accounting and tax. Not wading into a dispute.

I'm glad I don't have clients - enough trouble with staff and colleagues.

Thanks (1)
Replying to paul.benny:
avatar
By quixoteofthenorth
06th Jul 2022 07:37

Thanks for your response, Paul.

As far as (d) and (e) are concerned, as the accountant for the company I am acting for both. As such, I always do try to avoid getting drawn into disputes. In this case however, the one director actually dragged me into it.

When it comes to (b) there was indeed no shareholders agreement, and so if I understand you correctly it would appear that the director was not acting illegally in extracting the funds from the company's bank account.

Thanks (0)
Replying to quixoteofthenorth:
avatar
By paul.benny
06th Jul 2022 09:10

On the facts presented, taking funds from the company is not unlawful - but it may create reporting obligations (eg RTI). That's assuming company is solvent - if not, a whole different set of considerations apply.

Thanks (0)
Replying to quixoteofthenorth:
RLI
By lionofludesch
06th Jul 2022 12:02

At the point where you perceive a conflict of interest, you should choose to act for one party or the other. Or better still, neither.

You should make it clear that you're not prepared to act as some sort of fiscal umpire. Tell them to get solicitors and fight it out in court of they can't act like adults.

Thanks (3)
Replying to lionofludesch:
avatar
By Paul Crowley
06th Jul 2022 22:20

Agreed
Neither party will be happy if you are fair
Pick a side or better still resign.
This will not end well for either party and you will end up with hours on the clock and no client

Thanks (0)
avatar
By Wanderer
06th Jul 2022 06:49

Concerned? Curious?

Sorry your question doesn't come across as as genuinely objective, sounds much more emotive. Why did you even accept / not terminate a call whilst waiting to be 'wheeled into the operating theatre'?

This situation is going nowhere and you should stand back & only consider the detail if you genuinely believe there are reporting responsibilities.

Thanks (0)
Replying to Wanderer:
avatar
By quixoteofthenorth
06th Jul 2022 07:40

Hello Wanderer. Thanks for your response. Okay, I take your point - too much detail. I've always been too-much of a stickler for context.

Regarding your second paragraph, that is the thrust of my question - as to whether or not there are any reporting responsibilities in this case.

Thanks (0)
avatar
By Tax is always taxing
06th Jul 2022 08:27

It sounds like you very much side with Director B. I wouldn't be taking sides, refer both to take legal advice if they think the other has acted improperly.

With no shareholders agreement I can't see any reason why Director A was legally not allowed to carry out the actions he did on behalf of the company. I would be pointing them both to the numerous times you advised them that a shareholders agreement was advisable - even though they were on good terms at the time - if you didn't then its a good lesson to start doing this with your other clients (including families!).

Thanks (0)
avatar
By Paul Crowley
06th Jul 2022 09:01

Reporting obligations arising here to consider are SAR related.
You say that A is the owner of the building and the PSC
You do not state if A is the sole shareholder
The company is controlled by the shareholders. This is a company law issue.
There are 3 entities, but you say you are acting for both?
You ignore event 2 but consider that event 3 could be criminal?
I hold no opinion
This is a shareholder dispute if director B holds any shares, but if he is not a PSC then his shares are worthless, being less than 25%.
If B holds no shares then he is just an employee that took money out of the company.
If A and wife jointly hold 75% or more, then in reality they can do anything they want to. They control the company

Thanks (0)
avatar
By Paul Crowley
06th Jul 2022 09:44

I think this is a dead company.

Thanks (0)
avatar
By bernard michael
06th Jul 2022 09:44

I wouldn't even bother with as it'll get very messy legally or not. Disengage and let them sort it out
As I've said previously many times one of the client types I refuse to take are pubs as they can be prone to this sort of nonsense

Thanks (0)
avatar
By Calculatorboy
06th Jul 2022 10:00

Don't get involved. its primarily looking like dispute between the 2 of them .just prepare accounts with a list of representations made by the director you normally take instructions from. Send them both a copy , leave ball in their court .insist on payment before further work

Thanks (0)
David Winch
By David Winch
06th Jul 2022 10:10

Hi, I think you said both A and B hold 50% of the shares - but you say A is "the PSC". Surely A and B are both PSCs.
Also you say you act for the company but you are "acting for both". If A and B are not your clients (personally) then you are only acting for the company.
You need to get instructions from THE COMPANY. This means instructions agreed by a majority of directors (and if there are only two that means both of them). If you cannot get such instructions (for example because they cannot agree) then you should seriously consider resigning. Let's face it, this client is nothing but grief!
With regard to the question of criminality, you have to ask yourself whether either (or both) of the directors have acted DISHONESTLY. If you think they have then you have a suspicion of theft (or perhaps false accounting or fraud) and a legal duty to file a Suspicious Activity Report with your MLRO / the NCA.

Thanks (2)
Replying to davidwinch:
avatar
By Calculatorboy
06th Jul 2022 17:09

SAR...really ? This is a micro company ..one directors word against another ..as if the SFO would be interested ...there are bigger fish to fry .

Thanks (0)
Replying to Calculatorboy:
avatar
By Tax Dragon
11th Jul 2022 10:18

Calculatorboy wrote:

..as if the SFO would be interested

When did that become your decision to make?

(Also, you are thinking too narrowly. It's not only about whether any visible [to the reporter] action results from a report. Statistics matter to government.)

Thanks (0)
avatar
By Calculatorboy
06th Jul 2022 20:10

What the hell has your surgery got to do with this

Thanks (0)
Melchett
By thestudyman
11th Jul 2022 09:59

I would not get involved with this - let the directors continue to fight each other.

First red flag (of many) is that director A claimed to have sacked director B. If this is meant to mean relieving the director of their office holder duties, then this can not be done if they are both 50/50 shareholders. They would need a majority vote of more than 50%. So Director B would argue they are still (rightfully) a director.

Thanks (1)
x
By rockallj
18th Jul 2022 17:02

You're already dragged into it and it will only become murkier.

You will suffer a conflict of interest, if you haven't already and should serious consider resigning.

Thanks (0)