“How will this affect me if the company is insolvent or having cash-flow problems?”
If you have taken dividends from your company whilst the company is insolvent these dividends are known as Ultra Virus – meaning beyond your power, or authority. In other words the director has paid him/herself when they should not have. Commonly called illegal dividends, they may be entered on the accounts as borrowed money from the company. If you do not repay this money – it is essentially an offence from a tax perspective and this is known as an overdrawn directors loan account. When a company becomes insolvent this can have serious personal implications for you if it is not addressed properly. When you consider that, on average, over 70% of all directors in the UK have an overdrawn director loan at some point or another it is considered to be a large problem.
So how does the situation occur?
The most common way is when a director takes advice from an accountant who tells them to take a minimum salary to keep national insurance and tax at the lowest levels. The remainder of the remuneration is then taken as dividends. At first, everything works fine until something goes wrong with the cash-flow years later and the company runs into problems. The company may not be making the same profits as before or the company may have to close due to unforeseen circumstances.
The problem also impacts on creditors. If you see it from their point of view, they may argue that you have spent their money. In any event, you become a debtor; owing money to the company. If the company is forced into liquidation and even in voluntary liquidation the problem is compounded as a liquidator acts for the creditors and he/she will be expected to recover this money for the creditors. Unfortunately, a company voluntary arrangement would still have the same issue and would not resolve the problem as the overdrawn directors’ loan account would still need to be addressed appropriately. Finally, if the company is subject to a winding up petition the situation is in the hands of the official receiver. The overdrawn directors’ loan account may make matters worse and a director could be accused of trading irresponsibly (wrongful trading), which can have serious consequences. You should seek professional advice immediately if you are faced with these situations. You can also have a look at our common business challenges page to get solutions to the most common challenges faced by directors.
Ideally contact us if you are considering company liquidation on 08000 746 757.
Director loan accounts in insolvency
If your account is still outstanding at the point of liquidation, the Liquidator will seek to recover this money for the benefit of the creditors. The Liquidator will need to bring the books and records of the company up to date and establish what monies were taken out by way of dividends, salary or as a loan. Obviously, from the Liquidator’s point of view they will need to negotiate with you from an early stage as far as repayment is concerned.
The Liquidator will need to ascertain your personal means for example, the equity in your matrimonial home or other assets you may own, obtain copies of your personal tax return and consider the benefit to creditors and the extent to which any potential legal action could bring to creditors.
There is no hard rule, when it comes to director loan accounts and the Liquidator whilst ensuring that monies are recovered into the estate will also need to make a commercial decision in accepting any offers made for repayment.
Key points to remember:
- You should not be taking dividends if your company is not making a profit.
- If your company is insolvent, you must avoid taking dividends as this will add to an existing overdrawn directors’ loan account.
- If your company is being forced into liquidation and you have an overdrawn director’ loan account then please speak with one of the team immediately
Prefer to talk? To speak with an overdrawn loan specialist now – call us for a free, confidential consultation about how to tackle your overdrawn directors loan account on 08000 746 757 or use our live support feature at the top of the page.
Author: Mike Smith