Managing Shareholder Current Accounts

What is a Shareholder Current Account?

During the life of the company, funds taken out or put into the company by the shareholders is recorded to the shareholder current account. Usually at the start of a company, working capital is introduced. This balance is usually the opening balance of the shareholder current account. This is separate to the funds paid for share capital.

A shareholder current account is a record of the net balance of funds introduced and withdrawn by the shareholder. This moving balance is recorded on the balance sheet and may fluctuate from being an asset of the company to a liability of the company. Drawings are recorded as deductions from the current account. Drawings are where you draw down funds (and are not paying PAYE on the money that you are taking out of the company) to pay your personal expenses.

Overdrawn Current Accounts

An overdrawn current account is recorded as an asset in the balance sheet of the company (ie if called up it creates cash). An overdrawn current account is where the shareholders have taken more out of the company than they have put into the company and therefore owe the company. This balance if recorded as an asset is recoverable by the company from the shareholder on liquidation. This balance if recorded as a liability, is a claim the shareholder has against the company on liquidation. That claim can be unsecured or secured if proper documentation has been completed.

Managing Current Accounts and Protecting Advances made

It is advisable for any shareholder advancing funds personally to a company to prepare security documentation and loan documentation and to register securities on the PPSR to protect advances made. On liquidation this can improve a shareholder’s standing for recovery of that sum.

It is also advisable for shareholders taking drawings to ensure they manage their current account position so it is not grossly overdrawn. Often it is better for a shareholder employee to take a wage/salary and pay PAYE. An overdrawn current account is an easy target for a liquidator.

Overdrawn Current Accounts in Liquidation

The principle duty of a liquidator is to take possession of, protect, realise and distribute the assets or the proceeds of the realisation of the assets, of the company to its creditors.

On liquidation an overdrawn current account is called up by a liquidator. Shareholders are obliged to refund the net drawings taken. Most Accountants will ensure that at end of each financial year the shareholders declare a salary personally and also minute what a fair salary may be for the ensuing year. The salary is recorded as a credit against the Current Account in the balance sheet. A salary therefore reduces the current account debit balance and can return it to a credit balance or reduce the debt owing by the shareholders to the company. The individual then pays personal income tax on the salary in their personal tax return. A salary is declared if the company has earned a profit.

Other common options to fix an overdrawn current account are for the shareholder to advance more funds or for a dividend to be declared.

Current Accounts are often targets of liquidators. Liquidators will look at:

• Combined current accounts and if certain shareholders have debit balances to pursue;
• Insolvent Transactions – entries clearing the current account immediately prior to liquidation;
• Transactions at inadequate consideration or for excessive consideration;
• Journal entries covering up insolvent trading;
• Setoff of shareholder loans with current accounts;
• Significant withdrawals after the last prepared financial accounts
• Unapproved salaries (no solvency certificate or certificate of fairness recorded)

If a transaction is deemed to be unfair it may be required to be refunded. Transactions between a company and its directors need to be disclosed and a certificate of fair value completed for remuneration and loans.

A liquidator will call up an overdrawn current account. This may lead to an agreed repayment arrangement, a settlement for a lesser sum subject to a statement of financial position or worst case proceedings being filed. Each case is different.

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