As a director of a company you may feel that the limited liability status of the company will enable you to walk away from a failing company without any personal liability. However, under current legislation a liquidator or an administrator of the company may be able to take action against the directors if they fall foul of various legal requirements.
Dividends have to be legal. They should be properly documented at the time they are declared, not by your accountant backfilling with false documentation some time later, and there must be sufficient reserves to cover them.
Loans taken from the Company
When you simply take money from the company this is charged to a loan account and you may owe this money back to the company. If you do then you can expect action against you for it’s recovery. You simply cannot just take money from the company without it being justified in some way.
You cannot prefer one creditor over another to the disadvantage of other creditors. As a director, you cannot simply pay the creditors, including your own Director’s Loan Account, which will you with some benefit, and leave others unpaid.
Where the directors know that the company is insolvent, yet continue to trade on despite knowing this, they can be called to account if the company is liquidated.
Selling goods at Undervalue
You cannot sell any of the assets of the company to a third party, such as a lifeboat company you have created, at less than market value. If you transfer assets out of your company you must pay the market value for them.
Whilst there should not be any problem with regard to normal wages and salaries, any abnormal pay compared to the trading activities of the company can be questioned.
Other Excessive Benefits
Similarly, other benefits that you may take, such as pension contributions, if excessive and outside the normal activities of the company can also be questioned.
None Payment of Taxes
The liquidator may take actions where it is shown that the company has failed to make any payments for VAT, Corporation Tax, PAYE etc and this has enabled the company to continue trading into an insolvent position.
Trading under Similar Names
There are restrictions to prevent you trading through a new company with a similar name as the old company that has gone into liquidation. If you do start a new company then you should consider using a different name.
Breach of Fiduciary Duties
Directors have certain duties to the company and action can be taken against them if there is a breach of these responsibilities. They may also be called to task if they misappropriate the assets of the company and also face being barred from being a company director by Companies House.
The above list is not exhaustive and only includes the most obvious misdemeanours that a director may have to answer for. Needless to say all directors in these troubled financial times must take extreme care.
It is essential that you do things correctly, particularly with regard to the extraction of money for yourself. If you simply take what you like and expect an accountant to “make it right” at the year end, you are likely to get a very big shock should the company eventually go into liquidation.
If you are not getting the correct advice on the correct way to extract funds from your company, please do not hesitate to contact us at DEB Chartered Accountants. We will help you to protect yourself against potential threats from liquidators.