Drawing on a Directors Loan Account

[WilsonJK]

What is the legal standing on the following:

A dircetor withdraws e.g. £3,000 from their directors loan account (which is in credit) but has informed fellow directors that their is insufficient funds to meet their salaries?

[The Master]

you dont mention if the bank account required two signatures, or if the director withdrew the money on a sole signature (but in accordance with the bank mandate) without their knowledge.

In either event, unless there is an agreement in place to postpone withdrawal of directors loans, he has acted legally. Its just akin to the bank reducing a company's overdraft facility by 3k after a 4k lodgement has been made. ie protecting their own interests.

I'll leave the ethical aspects aside.

[Jaydee]

..unless there is an agreement in place to postpone withdrawal of directors loans, he has acted legally...

...unless you try arguing that the inability to pay salaries is prima facie evidence that the company is insolvent, and the director has preferred one creditor to the detriment of others.

Although such an argument may open a "trading while insolvent" can of worms.

[The Master]

yes, the "trading while insolvent" issue would appear to be the spectre looming in the background.

If the OP is one of the two aggrieved directors, he/she better take steps to cover their own derrière to ensure they are not deemed complicit in such a scenario.

Background, and specifics are sparse here, but at very least ascertain if a deficit may be evident, and have it minuted one way or the other. If any suspicion of insolvent trading, the directors need to consider remedial action, and inform any non directorial shareholders.

[WilsonJK]

Only one signature was required to withdraw money from the company bank account, cheque book and accounts held and ran by the director who withdrew from there directors loan account.

Situation with bank was as follows: overdraft facility of £100,000 with balance of - £97,000 - the director withdrew the £3,000 on the 7th (using the director loan account) then held a meeting on the 8th to inform myself and the other directors that they would not be paid as there was no money available and we were unable to pay creditors.

I have resigned from the company as a director and employee as I do feel the company is trading illegally.

Surely this action by the director (also the company secretary) is moraly wrong and unethical, if not illegal?

Is this the sort of thing that should be reported to companies house?

[The Master]

if only one signature required and was extracted prior to the others, then yes it is a moral and ethical issue more than a legal one, however there are a few more important issues reading between the lines.

The bank have a 100k O/D , which presumably in these days is either secured on company assets, or else subject to a directors guarantee. If the latter, merely you resigning as director does not exempt you from the bank pursuing you in the event of default.

Companies house is not the venue to report issues of unethical practices, but rather than resign, you'd have been better demanding a statement of assets/liabilities.

Company law states that a company should be able within a reasonable time (generally considered a few days) to be able to produce a list of what it owns, what it owes and what it is owed by others.

You dont mention shareholding, but it may be more prudent for an Extraordinary Meeting to be called of all directors and shareholders, and discuss the matter to consider whether the company is insolvent, and if so, can it be salvaged.

If the other directors and shareholders are aggrieved at one persons mismanagement, its better for the others to join together, and remove him from office, inform the bank, and depending on circumstances inform the other creditors that a resteructuring is taking place, and "to bear with you"

In some cases, this would be an idiotic suggestion, but depending on the business model, the vat man , PAYE man, and Corp Tax man will afford longer terms, and depending on the other type of trade creditor, they would probably rather take a gamble on getting say 80p in the pound, rather than 10p in the pound in a forced liquidation.

Do a google search on Company Voluntary Arrangement, it may be expedient to consider this as a way of seeking protection.

It is impossible to give any meaningful advice on a forum, on anything other than simple queries. Your accountant should know the ins/outs of the company, and he/she is best placed to advise you your circumstances.

Yes resignation is generally an initial knee jerk reaction, but you may have excluded yourself to your own detriment, and dont forget the issue of directors guarantees to the bank. The one thing you cant do is stick your head in the sand, and hope the other directors will salvage the situation..

Remember, you have just lost your job.

[Dave Shaw]

If the company is insolvent and ends up in liquidation then it is likely that the payment will constiture a Preference to the director concerned.

Unfortunately as The Master points out, resiging has excluded you from certain rights to information etc. Resigning also doesn't prevent the issue with regard to personal liability for wrongful trading (trading whilst insolvent), etc - directors are expected to deal with any problems not just resign.

The preference and any issues relating to wrongful trading would, if the company ends up in administration or liquidation, be considered by the practitioner concerned and appropriate action taken. This may involve seeking recovery of the funds and reporting the matter to BERR (DTI) to consider disqualification of the directors.

If you are a shareholder I would urge you to take action to bring the matter to a head to prevent any further liability. Alternatively you could consider winding up the company as a creditor.

[S Thatcher]

I'd like to echo what Mr Shaw has said. If you haven't got the funds to wind the company up, hasve you still got allies as directors within the business who could pass a resolution to wind up the business. If it is insolvent the Directors need to show that they are taking steps to minimise loses. As an outsider now it is very dificult for you to influence things but you may find yourself having to answer questions.