Directors in the Spotlight

John Wiblin, Partner and Head of Dispute Resolution, explains why directors seek his advice and answers key questions about taking money out of a business.

QA

When do company directors instruct you?

When their interests and those of their company are not aligned. That might happen where shareholders accuse the director of misconduct, or of running the business to benefit only some and not all shareholders, where the company is in liquidation and a liquidator is pursuing a director for money, or where the authorities are looking to have them disqualified from being a director.

Q Is it always true that directors are not personally liable for the debts of their company?

AIt is mostly true. The purpose of companies is to let owners and managers of a business protect their personal assets if the business fails. But there are rules and consequences if one breaks them.

If an owner treats the money in the company as their own and dips into that account as if it were their personal wallet then the law may consider that the business is not really in a company at all. Then the director may be wholly responsible for the debts of the business.

But more commonly, if the business fails, and the company is wound-up, the company’s liquidator will look to see if the directors have conducted themselves appropriately. And the liquidators may ask those directors to pay money to the company in liquidation to make good any loss to creditors.

Q What sort of misconduct can produce that result?

ATaking money or assets without approval of the board or without the company getting proper value in exchange, paying themselves when it was clear that other creditors would not be paid, inflating expenses, employing family members whose work does not justify their wage –that sort of thing.

Generally, directors have a free hand if shareholders approve and, if all creditors are paid, no-one complains. But if creditors get less because of it, then that is a problem.

Q What is the most common reason directors get sued by liquidators?

ADirectors can build up substantial directors’ loan accounts (DLAs) in the company as a way of taking money out tax free before the company is profitable enough to pay a dividend.

There are only two legitimate ways for an owner/manager to take money out of a company. Those are either by way of a wage, in which case, a liquidator will expect to see an employment contract and records of Pay As You Earn and National Insurance payments. Or by dividends declared annually by the board after determining that the company has sufficient distributable reserves to pay a dividend. Anything else paid out will be attributed to a DLA.

And on liquidation one should expect the liquidator to demand payment of the DLA in full. That includes remuneration taken monthly in advance on account of dividend – if the dividend does not ever get declared at the end of the year, then all the payments made will be treated as a loan to the director that is repayable.