McDonald Vague The Insolvency & Business Recovery Specialists

The overdrawn shareholder current account

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Each year we give advice to company directors.  We sit down with these directors, and sometimes their advisors, and analyse the situation.  We hear what the company was doing and how it started.  We learn the company's underlying weaknesses and the event that triggered the visit to our offices.  We prepare a draft statement of affairs and help the directors come to a decision as to what course of action they should adopt with their financially distressed company.

Often, outside factors have a bearing on the decision reached.  Have the directors lost their fight and drive?  Are they coping with the stress?  Do they still get on with each other or is there a deadlock in the company's management?

The one external factor which often outweighs all others is that of the directors'/shareholders' current account.  Ask directors whether they owe the company money and they will invariably assert that the company owes them.  On the other hand, an examination of the accounting records often reveals that the director/shareholder owes the company.  Often the confusion has been added to by the way in which the current account is shown in the accounts.  Sometimes it is included with shareholders' funds.  On other occasions there are two directors/shareholders.  One has a debit current account and the other is in credit.  The accounts are not shown separately, but are simply netted off against each other.

Overdrawn current accounts commonly occur because drawings have exceeded directors'/shareholders' remuneration over a number of years.  This is often tax driven.  Where a company is making losses and there is a shortage of cash flow then the accountant reduces the combined tax of the directors/shareholders and the company by not declaring a salary to the directors/shareholders.

The thinking of the insolvency practitioner on the other hand is different.  If the company is making losses it is imperative that the directors'/shareholders' current account be in credit at all times.

Often one is led to the conclusion that matters would be simpler and easier to control if all directors/shareholders were to be in the wages book for their base salary.  This would have the effect of limiting the amount by which their current accounts would be overdrawn.

If a current account is overdrawn, a liquidator has a clear duty to take whatever steps are necessary to collect that amount.

The consequences of the liquidator suing the directors/shareholders in respect of their current accounts could well be that the unsuspecting company accountant could be sued by their former client for not advising them of the dangers of overdrawn current accounts.  Insolvency practitioners believe that current accounts should not be overdrawn.  If, however, for tax reasons an account does become overdrawn, the accountant should record in writing the advice that is given to the client so that they have a defence if sued.

To prevent a subsequent attack by a liquidator it is essential to go through the necessary steps when declaring salaries.

The main things to remember are -

• Remuneration to directors
  The directors must issue a certificate as to fairness of the remuneration to directors - Section 161 Companies Act 1993
• Remuneration to shareholders
  The directors must sign a Solvency Certificate, which certifies the company is solvent - Section 52 Companies Act 1993
• Remuneration to directors/shareholders
  Certificate as to fairness and Solvency Certificate required

Note that Section 298 of the Companies Act 1993 empowers a liquidator to challenge a transaction for excessive consideration with directors and certain other persons.  The company's accountant should be anxious to ensure this does not happen.

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.