As an insolvency practitioner, I understand that director payments from a company are an important issue because of the duties owed by directors to shareholders and creditors. In this article, I will provide you with an overview of director payments and what you need to consider to ensure that payments are proper and in the best interests of the company.
First and foremost, it is important to ask yourself whether the payment is for the director personally or for the company. It is crucial to ensure that payments are made for the benefit of the company from an objective viewpoint. This means that the payment should not solely benefit the director, but rather benefit the company as a whole.
Another important consideration is whether the company can really afford to make the payment. It is essential to keep a full and proper record that identifies and evidences the payment and its purpose. This is important because proper records will be needed to justify the payment if it is ever questioned.
It is also important to consider whether the company is already insolvent or of doubtful solvency. If this is the case, it is even more critical to ensure that payments are proper and in the best interests of the company.
When making director payments, it is essential to ensure that they have been authorised by the other directors. If the payment is a personal payment to a director, it must be ratified by shareholders.
If a director does not act with adequate propriety and causes loss to the company, the payments to them can be subject to a claim by a liquidator for misfeasance. Misfeasance is a breach of fiduciary duty that occurs when directors receive any loan made to them to meet personal expenditure. This is a serious matter, and it is important to ensure that all payments are proper.
In summary, it is important to consider the following checklist of considerations when making director payments:
- Is the payment for the director personally or for the company?
- Is the payment in the best interests of the company from an objective viewpoint?
- Can the company afford to make the payment?
- Is a full and proper record retained, identifying and evidencing the payment and purpose?
- Is the company already insolvent or of doubtful solvency?
- Has the payment been authorised by other directors?
- Has a personal payment to a director been ratified by shareholders?
Remember, the burden of proof lies on the liquidator to prove that a company director has received company money. Once he has proven this, it is then for you the director to prove the payment was legal. To do this, it is essential for you to keep contemporaneous proper records which show that the payments were made in the best interests of the company.
If you have any doubts about the propriety of a payment, it is best to seek professional advice to ensure that you are fulfilling your duties as a director. The duty owed to a company is a subjective one, and your conduct will be considered with particular care. Therefore, it is essential to exercise reasonable care, skill, and diligence when making director payments.
Please note that this article covers general director payments. Read my other articles on directors’ overdrawn loan accounts and dividends – Click here and Here – and the coming article on preferences if the facts relevant to you should apply.