Overdrawn Directors Loan - Liquidators Leave Door Open?

[Gyumri]

It's Monday - if you call the BV department they may be able to give a definitive answer as to whether the debts of a dissolved company are bona vacantia.

In the case of Quillan, I am sure HMRC will appeal on the basis that debts due to a company are written off automatically on dissolution which entitles HMRC to treat the director's overdrawn DLA as personal income and hence chargeable to income tax.

Hence like other debts there is nothing which can be called bona vacantia if debts owed to companies are extinguished on dissolution.

 

[Elliot Green]

It's Monday - if you call the BV department they may be able to give a definitive answer as to whether the debts of a dissolved company are bona vacantia.

In the case of Quillan, I am sure HMRC will appeal on the basis that debts due to a company are written off automatically on dissolution which entitles HMRC to treat the director's overdrawn DLA as personal income and hence chargeable to income tax.

Hence like other debts there is nothing which can be called bona vacantia if debts owed to companies are extinguished on dissolution.

You refer to the proposition "if" debts are extinguished on dissolution. Debts owed to a company do not appear to be extinguished on dissolution - see Section 1032(1) of the Companies Act 2006:

"The general effect of an order by the court for restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register." [added emphasis]

In Quillan, the judgment does not suggest HMRC's pleaded case was that on dissolution the book debts / debtors are written off; HMRC's case appears to have been that the lack of pursuit by the liquidator of the ODLA amounted to a write off position:

"Equally, where the liquidator does not write off or release the loan balance, but, on a balanced view of the facts, it is clear that the company and / or liquidator are not intending to pursue the outstanding loan, e.g. where they are not making any attempts to collect it or have given up any attempts to do so, then we should argue that the loan has been written off and the S415 ITTOIA05 should apply to the relevant amount." [added emphasis]

 

[eteb3]

In Quillan, the judgment does not suggest HMRC's pleaded case was that on dissolution the book debts / debtors are written off; HMRC's case appears to have been that the lack of pursuit by the liquidator of the ODLA amounted to a write off position:

As so often, law as such and the law of tax being quite different beasts. (Not to mention the accounting treatment, which is another species again.)

 

[Gyumri]

You refer to the proposition "if" debts are extinguished on dissolution. Debts owed to a company do not appear to be extinguished on dissolution - see Section 1032(1) of the Companies Act 2006:

"The general effect of an order by the court for restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register." [added emphasis]

In Quillan, the judgment does not suggest HMRC's pleaded case was that on dissolution the book debts / debtors are written off; HMRC's case appears to have been that the lack of pursuit by the liquidator of the ODLA amounted to a write off position:

"Equally, where the liquidator does not write off or release the loan balance, but, on a balanced view of the facts, it is clear that the company and / or liquidator are not intending to pursue the outstanding loan, e.g. where they are not making any attempts to collect it or have given up any attempts to do so, then we should argue that the loan has been written off and the S415 ITTOIA05 should apply to the relevant amount." [added emphasis]

The effect of an order to restore is clear but in the absence of an order to restore I cannot see why the debts owed to a company cannot be regarded as also dissolved. It would seem absurd to say that the debtor then owes the debt to an entity which no longer exists! If the wording was that all assets pass to the Crown then it would be different.

As for a liquidator somehow being able to tell the revenue that it hasn't written off a debt or given up attempts to collect it despite dissolving the company, this position seems to be untenable.

"On a balanced view of the facts" the fact that a company has been dissolved can only lead to the conclusion that a liquidator has written off the debt as being unenforceable or economic to pursue - which amounts to the same thing.

A liquidator cannot dissolve a company and at the same time reserve his or her position re the debts owed to the company. They must be written off in the same way as the company's debts owed to others are written off.

 

[Elliot Green]

The effect of an order to restore is clear but in the absence of an order to restore I cannot see why the debts owed to a company cannot be regarded as also dissolved. It would seem absurd to say that the debtor then owes the debt to an entity which no longer exists! If the wording was that all assets pass to the Crown then it would be different.

As for a liquidator somehow being able to tell the revenue that it hasn't written off a debt or given up attempts to collect it despite dissolving the company, this position seems to be untenable.

"On a balanced view of the facts" the fact that a company has been dissolved can only lead to the conclusion that a liquidator has written off the debt as being unenforceable or economic to pursue - which amounts to the same thing.

A liquidator cannot dissolve a company and at the same time reserve his or her position re the debts owed to the company. They must be written off in the same way as the company's debts owed to others are written off.

The reason the debts do not dissolve, it seems, is because of Section 1012.

Let's explore the logic the other way. How does a creditor owed a debt, reinstate a company if the company is already six feet under? Ordinarily, life that has flatlined cannot be restored. However, another statutory provision in the Companies Act 2006 enables companies to cheat death ie. Section 1029.

Writing off a debt requires a conclusive act of some sort - see Plumpton v Revenue and Customs [2024] UKFTT 367 (TC):

First, there are no documents at all from that tax year showing the DLA being written off at that point. The new management had been in place for over a year by that point. Had there been a meeting of the board or other effective decision to write the DLA off by APE 31 January 2014 we would expect some form of company document saying so from the time (or some confirmation from the administrators beyond the minutes and financial statements themselves). Even allowing for the fact that certain things may have been done informally, there is not even the hint of a reference. Unlike the transfer of the Butteries to Mr Plumpton, the 2013 agreement did not contemplate the DLA being written off before Mr Plumpton was paid £1 million for his shares in the company which did not happen in the relevant tax year as it should have (or at all). Although the company could have decided to unilaterally write off the DLA, the terms of the 2013 agreement and the fact that it was not communicated to Mr Plumpton at that point support, in this case, the finding that this was because that did not occur.

You say:
"A liquidator cannot dissolve a company and at the same time reserve his or her position re the debts owed to the company. They must be written off in the same way as the company's debts owed to others are written off."

There does not appear to be an authority that underpins that submission.

 

[Gyumri]

You say:
"A liquidator cannot dissolve a company and at the same time reserve his or her position re the debts owed to the company. They must be written off in the same way as the company's debts owed to others are written off."

There does not appear to be an authority that underpins that submission.

The case you quote simply affirmed that the DLA was not written off by the company because Mr Plumpton had not received his £1m for his shares (which would have enabled him to pay back his loan. It has no relevance to the question of the status of debts due to a company on dissolution.

I will check out the other point re authorities.