Company Directors in trouble with liquidator

[Daybooks]

Adding to what @Elliot Green has said….

As a director you did have responsibility for maintaining accurate records. But that said it does sound like the correct financial position has not been established. The IP has probably got some outdated or incomplete financial position believing it to be correct.

It is difficult to see a defence for not knowing what dividends are being paid as dividends are approved by directors with final ones also by the shareholders.

Your full annual accounts would show this and you should have dividend vouchers to support your dividend income on any personal income tax returns. Thus from an individual perspective you should be able to ascertain what funds you took out from the Company and what they were for including any amounts loaned to the Company by way of settling any Company bills on their behalf.

A Directors Loan Account is a history of all amounts transacted with you that are not withdrawals by way of salary, dividends or business expenses along with money deposited by you from your personal banking. Whilst it can include salary, dividends and business expenses these are not loans to you but are often accounted for here in order to reduce the balance owing by the directors.

The IP seems to have asked you for your version of this. As you should be able to deduce your version and the Company’s version should agree.

Perhaps you need to undermine their position by proving their numbers incorrect, if indeed they are (Item 2 of Elliot’s notes). For example if you personally paid the Company’s VAT bill and can prove it then the Company’s VAT account should show this with a corresponding credit to the Directors Loan Account. If either one is missing then there is an error. Repeat for the fixed asset purchase. Thus you may demonstrate that their balance on the Directors Loan Account is incorrect for errors of omission. As stated before unless and until all balance sheet accounts are proven there is room for doubt.

 

[Newchodge]

Yes, I have, I was eligible for £7,000. I have everything in writing from them.

Did you receive £7,000?

 

[Elliot Green]

Thank you so much for your reply.

This is exactly which caused the problems for me, because accounts where not done, the liquidator asked me to calculate my DLA just by going through the bank statements. I am not an accountant and didn’t know anything about how the DLA is calculated. For example I didn’t have information about my dividends which where credited to my DLA. I was completely misled by the IP, given false information (like all debts will be written off) at the beginning. Then 6 months later he started sending me letters pursing me for large amounts of money for my DLA. I find this process so unfair and unjust.

One notable issue is that in general terms an IP does not cause an Overdrawn Director's Loan Account ("ODLA") to arise.

If there is one it usually happens because of the conduct of a Director. The IP simply has to realise it if there is one.

A Director will usually have to repay an ODLA (subject to means and amount) when a company is insolvent such that it has no prospect of avoiding insolvent liquidation. This is because in such circumstances there is then no prospect of ratification (under Section 239 of the Companies Act 2006) of the ODLA being written off due to the Creditor Duty a Director has when a company is insolvent.

In such circumstances, it will likely be an uphill struggle for a Director to argue they have suffered any loss as going into liquidation does not realistically directly change that reality.

 

[Lisa Thomas]

Lots of thoughts here:

1. Why doesn't the liquidator want to 'accept' your reviews DLA calculation - which you believe is only £3k? What reasons have they given for rejecting your calculations?

2. The RPO claim has nothing to do with how much your overdrawn DLA amounts to I'm afraid. The RPO will also not pay out where you owe the company an overdrawn DLA so I suspect your claim will be objected to.

3. You mention somewhere that you feel you could have avoided liquidation but you also say the SOA deficiency is c£40k so there is an estimated shortfall to the creditors and shareholders of £40k. The SOA should also have taken into account your DLA - what figure is included in your SOA for the DLA?

4. I note you said the liquidator stopped you from filing accounts - this is standard advice because once the company is liquidated, there is no requirement to file the accounts.

 

[Daybooks]

Lots of thoughts here:

1. Why doesn't the liquidator want to 'accept' your reviews DLA calculation - which you believe is only £3k? What reasons have they given for rejecting your calculations?

2. The RPO claim has nothing to do with how much your overdrawn DLA amounts to I'm afraid. The RPO will also not pay out where you owe the company an overdrawn DLA so I suspect your claim will be objected to.

3. You mention somewhere that you feel you could have avoided liquidation but you also say the SOA deficiency is c£40k so there is an estimated shortfall to the creditors and shareholders of £40k. The SOA should also have taken into account your DLA - what figure is included in your SOA for the DLA?

4. I note you said the liquidator stopped you from filing accounts - this is standard advice because once the company is liquidated, there is no requirement to file the accounts.

Be interesting to hear. My guess is 1) no communication/ too much effort required on IP's part. 4) A belief by many directors that accounts only have to be produced because there is a filing requirement.

 

[ukb]

Perhaps you should consider a separate thread. However I would trust that at face value what you describe would be unacceptable and hopefully as a minimum professional misconduct.

Your remedy should, in my view, start with allowing them to address your allegations.

Thanks Daybooks, I've started a new thread and

That would not appear to be binding because:

a) any *deal* could only be agreed in writing and signed off by a Liquidator who has been appointed and acts with authority, not the *proposed* Liquidator

b) a proposed Liquidator could get themselves into difficulty with a pre Liquidation *deal*:
(i) potential professional conflict
(ii) risk of compromising the company assets with incomplete information

c) if another Liquidator was appointed nominated by a creditor instead then any such deal could constitute confetti.

Perhaps you should consider a separate thread. However I would trust that at face value what you describe would be unacceptable and hopefully as a minimum professional misconduct.

Your remedy should, in my view, start with allowing them to address your allegations.

That would not appear to be binding because:

a) any *deal* could only be agreed in writing and signed off by a Liquidator who has been appointed and acts with authority, not the *proposed* Liquidator

b) a proposed Liquidator could get themselves into difficulty with a pre Liquidation *deal*:
(i) potential professional conflict
(ii) risk of compromising the company assets with incomplete information

c) if another Liquidator was appointed nominated by a creditor instead then any such deal could constitute confetti.

An IP knowingly relying on a set of accounts that is out of date and not seeking the current position is in my view somewhat unprofessional.

Yes you should produce a final set of accounts as at cessation date. It is imperative that you do. These will include your trial balance, profit and loss account and balance sheet. Its accuracy depends upon the proper recording of all your business transactions. I would question why the IP is not seeking it and demand an answer if they are not.

The purpose of checking or proving the balance sheet items is to obtain another verification of their accuracy. Thus if you have a fixed asset recorded then prove it exists; does the bank balance reported agree to the bank statement, do your creditor balances agree to their supplier statements, do your tax liabilities agree to what the HMRC Gateway accounts says. Similarly with a Director’s Loan Account – the director should be able to agree the balance in their personal capacity.

Thus if you loaned money to the Company to purchase assets or pay its VAT liability then independently you should be recording it as such and ensuring it agrees with the Company’s accounts. Any errors however caused should be corrected and recorded such that they correctly reflect the transactions of the Company.

You need to be comfortable that all the accounts on the final balance sheet are both understood and correct. Don’t stop until they are.

Whilst @Elliot Green is correct it that the statutory accounts don’t prove the balance in themselves they are a by-product of the final account production (trial balance) which in turn is an extract of the balances on each account. The balance on those accounts are made up the actual business transactions and directors assert they are true and fair. Thus any Director Loan Account balance is supported by the transactions.

Whilst you may lose the right of no longer being a director you don’t lose your rights as an individual.

@Daybooks

Lots of thoughts here:

1. Why doesn't the liquidator want to 'accept' your reviews DLA calculation - which you believe is only £3k? What reasons have they given for rejecting your calculations?

2. The RPO claim has nothing to do with how much your overdrawn DLA amounts to I'm afraid. The RPO will also not pay out where you owe the company an overdrawn DLA so I suspect your claim will be objected to.

3. You mention somewhere that you feel you could have avoided liquidation but you also say the SOA deficiency is c£40k so there is an estimated shortfall to the creditors and shareholders of £40k. The SOA should also have taken into account your DLA - what figure is included in your SOA for the DLA?

4. I note you said the liquidator stopped you from filing accounts - this is standard advice because once the company is liquidated, there is no requirement to file the accounts.

Lisa, you say "..this is standard advice because once the company is liquidated, there is no requirement to file the accounts" I, like may other small businesses, filed my accounts at the end of the year and paid watever tax my accountants said was necessary. When I went into liquidation, because I hadn't filed any accounts or paid any income tax at that point, all of my payments (IMO salary) were classed as directors loans and I had to repay them. So when you say there is no requirement to file the accounts, was that true in my case?

 

[Elliot Green]

Thanks Daybooks, I've started a new thread and







@Daybooks

Lisa, you say "..this is standard advice because once the company is liquidated, there is no requirement to file the accounts" I, like may other small businesses, filed my accounts at the end of the year and paid watever tax my accountants said was necessary. When I went into liquidation, because I hadn't filed any accounts or paid any income tax at that point, all of my payments (IMO salary) were classed as directors loans and I had to repay them. So when you say there is no requirement to file the accounts, was that true in my case?

A director has to file accounts. However, when a company goes into liquidation the director loses their powers under Section 103 of the Insolvency Act 1986, so without liquidator authority such accounts are usually not filed.

 

[Tables Force]

I, like may other small businesses, filed my accounts at the end of the year and paid watever tax my accountants said was necessary. When I went into liquidation, because I hadn't filed any accounts or paid any income tax at that point, all of my payments (IMO salary) were classed as directors loans and I had to repay them. So when you say there is no requirement to file the accounts, was that true in my case?

Don't thinks that is correct.

If it was reported (through RTI) correctly as salary at the time you took it, then it does NOT become a loan just because you haven't file accounts after the year-end.

 

[Lisa Thomas]

Don't thinks that is correct.

If it was reported (through RTI) correctly as salary at the time you took it, then it does NOT become a loan just because you haven't file accounts after the year-end.

This

Normally the liquidator will look at the last set of full accounts filed (and any available draft accounts) and then track the movement of any drawings via the bank statements.

If OP's drawings were a wage, then they should have wage slips, and RTI returns etc to HMRC to back that up.

 

[Elliot Green]

Don't thinks that is correct.

If it was reported (through RTI) correctly as salary at the time you took it, then it does NOT become a loan just because you haven't file accounts after the year-end.

The Articles need to permit director remuneration.

 

[ukb]

The Articles need to permit director remuneration.

Yes my article expressly permit directors to be paid "in whatever the company sees fit". I was never an "employee" with a monthly salary etc. For the 9 years the company was going I didn't ever report as salary, i just paid tax at the end of the year on the profit dividends. My accountant didn't ever flag it as an issue (I realised later that I could have tax-free salary of 12K each year If I'd known) just dividends at the end of each year.

Because I hadn't accounted for it as salary though, in insolvency it was treated as an overdrawn directors loan. Reclassifying it as DLA means I will have worked for 2 years for free for my own company and have to repay all that money to the liquidator whose fees, for a very simple case (HMRC only creditor at 1/4 of the amount I have to repay), are now sufficient for them to claim all of the repayment.

I had a DLA on my accounts for the previous year; my accountant "mistakenly" only used 2% of my allowable dividends that year and allocated 98% of the payments to me as DLA instead. I only understood what had happened much later when I went through the accounts in detail in liquidation. I'm in "discussion" with the accounting firm now about that decision. Had I not gone into liquidation, I'm pretty sure I wouldn't have been able to repay the DLA the next as required (it would have taken more or less all the company earnings from the next year) and in addition the S455 that I then had t repay plus extra P11D. I can't really understand why the accountant could have thought it was a good idea to leave all that dividend and allocate as DLA.

 

[Lisa Thomas]

Was your accountant employed for the company, as you personal advisor, or both? Were they instructed to give you personal advice on the most sufficient way to take your drawings?

 

[Elliot Green]

Yes my article expressly permit directors to be paid "in whatever the company sees fit". I was never an "employee" with a monthly salary etc. For the 9 years the company was going I didn't ever report as salary, i just paid tax at the end of the year on the profit dividends. My accountant didn't ever flag it as an issue (I realised later that I could have tax-free salary of 12K each year If I'd known) just dividends at the end of each year.

Because I hadn't accounted for it as salary though, in insolvency it was treated as an overdrawn directors loan. Reclassifying it as DLA means I will have worked for 2 years for free for my own company and have to repay all that money to the liquidator whose fees, for a very simple case (HMRC only creditor at 1/4 of the amount I have to repay), are now sufficient for them to claim all of the repayment.

I had a DLA on my accounts for the previous year; my accountant "mistakenly" only used 2% of my allowable dividends that year and allocated 98% of the payments to me as DLA instead. I only understood what had happened much later when I went through the accounts in detail in liquidation. I'm in "discussion" with the accounting firm now about that decision. Had I not gone into liquidation, I'm pretty sure I wouldn't have been able to repay the DLA the next as required (it would have taken more or less all the company earnings from the next year) and in addition the S455 that I then had t repay plus extra P11D. I can't really understand why the accountant could have thought it was a good idea to leave all that dividend and allocate as DLA.

Cases like Bass v Buchanan suggest improbable that go back and change now.

 

[ukb]

Was your accountant employed for the company, as you personal advisor, or both? Were they instructed to give you personal advice on the most sufficient way to take your drawings?

Yes, both, at the end of each year they'd do my company accounts and then personal tax return. Yes I asked them for the best way to take drawings.

 

[Lisa Thomas]

The issue is possibly that they only reviewed at the end of the year, instead of each time you drew a dividend to make sure there were sufficient reserves.

That means you were likely drawing unlawful dividends, which the accountant would not have known about until it was too late, hence probably having to be classed as DLA drawings.

 

[UK Contractor Accountant]

Yes, both, at the end of each year they'd do my company accounts and then personal tax return. Yes I asked them for the best way to take drawings.

what do you hope to achieve here? - whats done is done.

There is no way you can go back in time and amend the accounting records to record salary etc

 

[UK Contractor Accountant]

I had a DLA on my accounts for the previous year; my accountant "mistakenly" only used 2% of my allowable dividends that year and allocated 98% of the payments to me as DLA instead

you may have a claim against your Accountant if they advised you incorrectly on the most tax efficient way of extracting funds from the company if they were engaged to carry out that service.

 

[UK Contractor Accountant]

Cases like Bass v Buchanan suggest improbable that go back and change now.

The decision takes a stricter line to that taken in previous cases.

In Re Jones [2020] EWHC 1112 Mr Justice Snowden held that drawings could not be re-characterised as remuneration whenever it suited the director, but qualified this by suggesting that a re-characterisation could possibly take place if the director acknowledged that the manner in which the drawings had been disclosed to HMRC had been incorrect, with all the consequences in terms of the payment of additional tax, interest and penalties that this might entail.

In Re Global Corporate Ltd v Hale [2018] EWCA Civ 2618 Patten LJ suggested that, where unlawful
dividends had been paid during the year, the monies could possibly be notionally repaid and then re-applied in a way which was a lawful application of the company’s assets, although this formal step would need to be taken prior to the company entering liquidation.

 

[Elliot Green]

The decision takes a stricter line to that taken in previous cases.

In Re Jones [2020] EWHC 1112 Mr Justice Snowden held that drawings could not be re-characterised as remuneration whenever it suited the director, but qualified this by suggesting that a re-characterisation could possibly take place if the director acknowledged that the manner in which the drawings had been disclosed to HMRC had been incorrect, with all the consequences in terms of the payment of additional tax, interest and penalties that this might entail.

In Re Global Corporate Ltd v Hale [2018] EWCA Civ 2618 Patten LJ suggested that, where unlawful
dividends had been paid during the year, the monies could possibly be notionally repaid and then re-applied in a way which was a lawful application of the company’s assets, although this formal step would need to be taken prior to the company entering liquidation.

Don't agree with the "stricter" notion in Bass v Buchanan.

In both of the other cases quoted above, the estoppel is recognised.

In Re Jones there is a reference to the manner of the HMRC disclosure as having been "incorrect". That plainly does not suggest history and tippex can co-exist; it suggests a historical submission to HMRC was wrong and an amendment can be made.

In Re Global a step needs to be taken to bring about an update; it does not "... cure the illegality of the original payment.".