Stephen Wiles, Partner and Head of Corporate Recovery and Insolvency at Jacksons has written the following blog to help businesses take measures in order to survive an economic downturn.
Every business owner, now and again, will have that dark thought: what if my company doesn’t make it?
Nothing more than rational concern? Thankfully that is the case most of the time but what if….?
Over the years the Corporate Recovery and Insolvency Team at Jacksons has come across numerous companies in liquidation and administration. Too often there is a sense of déjà vu: if only the directors had taken certain steps before the company folded a lot of heart ache and expense could have been avoided.
Thankfully many companies that begin to struggle do survive.
If all is in order then great. If not, these are straightforward steps, that if taken now, could prove their weight in gold in future.
These steps focus around money passing between the company and its directors. To many, these are issues for the company’s accountants to deal with after the end of the financial year. Fine, so long as the company remains solvent and active at that point in time. But what if the annual tidying up with the accountants doesn’t happen because before then, the company goes in to administration or liquidation?
Starting point: every payment made by a company to a director will be debited to that director’s’ loan account unless it can be shown to be other than a loan. Stating the obvious, loans are repayable and in the absence of agreement as to repayment terms, its repayable on demand.
It is therefore common for a director’s loan account to build up during the year. Regular payments of £X per month and perhaps quarterly payments of £Y.
On the face if every such payment is a loan, it is due to be repaid to the company. The present directors of the company may not demand repayment, but future liquidators or administrators will.
The directors’ response to the liquidators or administrators: it wasn’t a loan as instead it was salary, reimbursement of expenses, bonus and dividends. That must be right as that is what has happened in previous years.
Unfortunately for the directors, that is how neither the liquidators/administrators nor the law sees it. Their view often comes as a shock to the directors but it is inevitable if the liquidators or administrators are to do their job properly. We therefore have a position where not only have the directors lost their company but now, at a time when they can probably least afford it, they face a demand for payment.
Salary
If money paid by the company is salary then the administrators/liquidators will expect to see written employment contracts or at least PAYE and NIC records.
Dividends
The administrators/liquidators will demand not only evidence of a dividend having been declared (as this was during the course of the year it will be an interim dividend declared by the directors as opposed to the shareholders annually) but also evidence that the company had sufficient distributable profits to pay a dividend. There may have been distributable profits at the start of the year but often that position changes during a bad year.
Reimbursed expenses
The company may have traditionally reimbursed expenses on an on account basis (again with a view to a divvying up exercise later) but that isn’t acceptable to the administrators or liquidators. Reference will be made to the absence of P11ds confirming those expenses and the absence of invoices and receipts may prove fatal. Again the administrators or liquidators demand the money back.
Steps to avoid the loss of a company being followed by nightmarish demands for repayment:
- Are you an employee of the company? Confirm that in writing and reflect salary payments through the books as for any other employee. Remember that unless your salary can be said to be excessive then you are entitled to be paid it and keep it no matter what happens to the company.
- Dividends: as and when the company has profits to distribute do so and complete the paperwork. It is unlikely the director will be able to keep the dividend paid after the company has tipped in to insolvency.
- Expenses: this is the company repaying a debt owed to the director. It could create a credit balance on a director’s loan account. Bear in kind that liquidators and administrators will review all debt payments as to whether the directors have paid themselves ahead of other creditors. Keep this up to date and try to deal with it on a monthly basis so that expenses are reimbursed as and when with documents to confirm: invoices, receipts, mileage records.
- Overdrawn director’s loan account: one of the first things the liquidators/administrators will look at. It’s cash due to the company and the director is a known quantity. Address this issue now: if dividends were to be declared that would reduce the overdrawn loan account then deal with it. Unpaid salary or expenses to set against it?
Think of liquidation or administration as a guillotine effect: for the company everything stops and starts again. Once that happens it is too late to take these steps. Acting as a director of an insolvent company isn’t an attractive prospect. These steps aim to stop that situation becoming much worse.
We are available to advise directors now. Our Corporate Recovery and Insolvency team has many years’ experience of acting for both administrators/liquidators and former directors and is able to advise as to legal issues and commercial reality.
Stephen Wiles, Partner and Head of Corporate Recovery & Insolvency
Contact Stephen at swiles@jacksons-law.com or call 01642 356500.
