You and the company are not one and the same thing, you are separate legal entities in the eyes of the law. And like any entity with which a company might be dealing, there could be a debtor / creditor relationship – you as a director owing money to the company or vice-versa. This article is about those situations where you as a director owe some money to the company, not the other way around.
How can this happen?
Typically there are three main ways in which this can happen:
- In accordance with your accountants’ advice, every month you took a nominal salary through the PAYE/NIC system and made up your package by taking a dividend at a time when the company had insufficient ‘distributable reserves’.
- You simply paid yourself some money out of the company.
- The company sold an asset to you, but you haven’t paid for it.
What happens if the company goes into liquidation etc?
The insolvency practitioner’s job, in all cases except CVA, is to realise the assets for the benefit of the company’s creditors. This is his prime duty, it’s one owed to the company creditors and not to you as an employee, director, or shareholder. This means he will:
- Investigate whether an overdrawn directors’ loan exists (he will not take your word for it); and
- Ask you to repay it.
He will not simply write it off!
Note that some IPs suggest that this is an area on which they will somehow work with you, some even write it off. The reality is doing so would be putting their own and their families’ livelihood at risk – the regulator to IPs will simply take away their licence to operate if they have failed to do their job properly. Many choose to ignore the topic at the advice stage of an impending insolvency – when they are supposed to be best advising you in your position as a director – only for them later on down the line, once they’ve secured their appointment as say liquidator, to ask for repayment. They do this because they don’t want to prejudice getting appointed, ensuring they get a paid job, and of course once they’ve been appointed they can be paid fees out of the realisations of the director’s loan.
In a company voluntary arrangement the position is different.
The IP’s job is to:
- Prepare a Proposal, which must reflect the director loan issue; then
- Implement what’s agreed by the creditors and members – this could be a monthly repayment from profits over time or a one off payment.
The point is in CVAs:
- The creditors and not the IP gets to make a commercial decision as to recovering the overdrawn loan (sure some creditors, especially HMRC will vote to see it repaid, but they might not be owed anything or might be outvoted by other third party creditors) and
- Even if it is to be repaid, better terms might be agreed.
Could you be sued by the IP for repayment of an overdrawn loan?
Yes, many directors are.
Liquidators, administrators and administrative receivers have the power to collect in and realise the assets of a company (including an overdrawn director’s loan) and take legal action in the Company’s name. They have the power to bankrupt you if unpaid.
Sure, they will often compromise in terms of the time period they will give you to repay, but you will have to evidence why you need longer than say 6 months to pay.
Can the IP compromise as to the amount?
Yes, liquidators, administrators and administrative receivers have the power to compromise any debt owed to or by a company, however the onus will be on you to demonstrate why a compromise is necessary, say because of your financial circumstances. Imagine that the IP has to explain to creditors why they’ve agreed to short settle, you’ll get an idea as to how much evidence is needed.
Can you somehow turn back the clock and create some additional salary passing through the PAYE/NIC system?
No, not with HMRC’s online PAYE system. And it’s illegal under the Companies Acts for directors to be paid a salary gross.
Several cases have passed through the courts in recent months considering the issue of payments to directors out of marginally solvent companies – possibly the most relevant one here is that of a company where the directors left their accountants to later classify payments. Click here. It didn’t work well for the directors.
Conclusion
The issue of directors’ loans is often a key one, which simply must be addressed at the advice stage, when the directors are working with the insolvency practitioner to decide on which course of action to take – liquidation, administration, administrative receivership or CVA – while still complying with their legal duties. Ignoring the elephant in the room is never a good idea and will often come back to haunt the directors.