Directors Loans

[septembergirl]

Hi There

I hope you can help!

I am in the process of selling my share in a business as I can no longer work with my business partner. We both have a 50% share in the business.

As this is ongoing I went to an independent accountant for their opinion and a few things have come to light regarding Directors Loans. My business partner has "borrowed" over £70k in an 18 month period. The withdrawals ranged from £1000 to as much as £18k in one month. Unfortunately I was unaware of this (yes I know more fool me!). It appears that he was helping himself to funds as and when he felt like it. Our accountant with whom he has a personal relationship with and who is also and investor in his familys company put all these withdrawals in a directors loan account. The accountant does work for us on a monthly basis so would have been aware of this from the start.

While I am aware that I should have been aware of this I wasn't until recently.

Can anyone advise me as to whether I would have had to agree to these "loans" in advance? I have looked into Companies Law 2006 but I am unclear on whether I would only have had to agree to withdrawals over £10k? Also, did the accountant have a duty to inform me of this and perhaps suggest and agreement rather than creating a massively overdrawn loan account.

There are also questionable expenses which include putting a personal tax bill through expenses, he paid £1400 in tax and claimed it back the following month in expenses. Again the accountant authorised this, is this even legal?

Apologies in advance if I have rambled on but I would really appreciate your thoughts and advice!!

Kind Regards

 

[mr. mischief]

Well one thing is that an overdrawn loan account has two separate implications:

1. If it is over £5k, that is an interest-free loan and must be reported on the P11d. This should be submitted by 5 July for 10-11 tax year.
2. If a loan balance remains unpaid 9 months after the year-end, there is a hefty additional 25% tax bill to pay though this can be reclaimed if the loan is later repaid..
3. Normally a personal tax bill is personal, whilst many of my clients pay theirs through the company it is always charged to the loan account. Where any personal items are being settled by the company and there is more than one shareholder, I will account for it in this way only if it is agreed in the board minutes. Once again this is a P11d benefit.

Ethically, if what you say is true then the accountant has much to answer. Where I have clients like this, I am even more careful to keep all parties regularly informed about transactions on the loan accounts - especially those who are not my immediate client, or those who I am not in regular contact with. Two such clients have been running overdrawn loan accounts and I've been very careful to keep all parties up to date on the state of play on these.

Whether that is a legal requirement or spelled out in Institute bye-laws I am not sure. If your accountant is qualified then a shot across the bows to the effect of a complaint to his or her Institute could be a good start.

 

[septembergirl]

Hi Mr Mischief

Many thanks for your response!

Yes unfortunately it is all true, there is a lot more to tell but I am obviously wary about putting a lot of info on a public forum!

I think the accountant is aware he is skating on thin ice as another accountant has been mentioned in correspondence between our lawyers. My lawyer responded and asked for a letter from this other accountant confirming he is happy that everything has been conducted in the correct manner as he is obviously familiar with the accounts and they refused.

I also have emails where the accountant and their staff have advised my partner that his expenses (fully expenses company car - no mileage book etc) is costing the company additional tax etc. None of this correspondence was copied in to me!

It appears that all decisions regarding the finances of the business have been done based on what suited my partner rather than what was best for the business!

I wrote to the accountant a month ago asking for details on 17 different issues regarding the accounts and as yet no response so yes I will be taking this to the issue. I did see on their site that an accountant cannot have bias etc when conducting their business and it appears he has allowed personal relationships to manipulate how me managed the accounts!

Hopefully I will post a success story in the future!

Thanks again!

 

[teddys]

If you wish to declare WW III there are several options:

1. Generally speaking decisions in a company are made by directors collectively called the Board. For ease of doing business sometimes powers are delegated to a particular director. All this depends on what your 'Articles of Association' say. Unless been specifically delegated to, the other director couldn't have taken unilateral decisions. From CA2006 you could have a look at:

s.175 duty to avoid conflicts of interest
s.177 duty to declare interest in proposed transaction or arrangement
s.197 loans to directors: requirement of members' approval

I could go on.


2. Tax implications

P11D notwithstanding there could be other problems with loans to participators of close companies e.g. s.455 of the corporation tax act 2010.

3. Breach of trust

Possibly, depending on your circumstances, you could also argue that there was breach of trust etc etc.

 

[septembergirl]

Hi Teddys

Many thanks for your response, I've found it really useful.

Our Articles of Association are pretty much bog standard but I will ask my lawyer to clarify this!

I was wondering if you had any thoughts on any specific breaches also made by the accountant and his duty? I plan to raking this to the Institute and any guidance would be appreciated.

I have found a letter today relating to the accounts from the accountant in which he briefly touches on directors loans, later that month my partner "borrowed" a further £11k. The accountant has tried to say it was in leiu of salary but this would mean that the company could not have afforded to pay my partners salary for over 2 years which is utter rubbish! In addition to this the amounts don't equate to salary and my partner in one year alone took £42k more than his annual pay.

I think that due to personal relationships my accountant has with my partner and his familys business he has been acting for them personally (the other business is in trouble) and not for our company!

Kind Regards

 

[mr. mischief]

One other thing - directors in law have a fiduciary duty to properly steward the assets of the company in the interests of the members. Many directors - for example at RBS - pay lip service to this, but it is correct.

First, is your accountant qualified - if so, with which Institute? If he is with a decent one, then the threat of taking this up with the Disciplinary Committee is ver much one he should be worried about.

I would ask him to justify how these amounts have been dealt with in the accounts, specifically:

1. Whether the balance on the director's loan has been declared in the Corporation tax return.
2. The amount of any section 419 tax at 25% either paid or payable unless the loan is repaid.
3. The amount of any benefit in kind identifed due to the interest-free loan.

If the response is that the loan account was not overdrawn, ask for a printout of this so you can identify how it was cleared. If by "salary" then this - for 10-11 - should just have been reported to HMRC on the P35, ask to check this. if by dividend, ask for the minutes approving the dividends and copies of the tax vouchers.

Any half-decent accountant will be able to produce this lot within 48 hours if the job has been done properly. Failure to do this, or woffle and excuses, means your accountant is not half-decent at the very least. Give him or her 7 days to come up with the goods or be reported.

 

[MyAccountantOnline]

First, is your accountant qualified - if so, with which Institute? If he is with a decent one, then the threat of taking this up with the Disciplinary Committee is ver much one he should be worried about.

Of course its a very serious issue if a qualified accountant has failed in his/her professional duties, but its easy to get side-tracked here, is not the issue of one director helping himself to large amounts of company money slightly more important here?

 

[GGGSurrey]

Of course its a very serious issue if a qualified accountant has failed in his/her professional duties, but its easy to get side-tracked here, is not the issue of one director helping himself to large amounts of company money slightly more important here?

I think of this forum as one that helps business people understand accountancy and how accountants work.

Directors acting in a way that does not please their fellow directors is not as rare, and hence no more interesting to me, than the question of what responsibilities a company's accountant has to the directors.

 

[teddys]

The accountant's duties (ethical and contractual) would depend on the terms of engagement. Contractual duties are covered within the engagement whereas ethical ones are enforced by all good firms and the major accountancy bodies. YOu could lodge a formal complaint with the accountancy practice and could escalate this further to the accountancy body's disciplinary committee.

As with what the other director is up to, in certain situtations, using the company money for personal use could be interpreted as theft! Your solicitor could provide further help.