30th October 2023
We are regularly instructed by clients who have an issue with a current or former director of their company because of the director’s conduct.
Clients are often seeking advice on their rights and remedies in these situations, with a view to remove the director, or recoup money from them.
Despite this, directors who approach us are often not aware of the pitfalls of using company money for their own personal use. Even if it is done with the most innocent of intentions.
This is something we always advise our clients to be aware of as they may have found themselves in a perilous position without realising the error of their ways. When setting up a limited company, directors can be mistaken in thinking that they can dip into their companies’ funds as they please. It is their money after all isn’t it?
All directors should be aware that a limited company, once incorporated, becomes its own legal entity. What a lot of directors fail to realise is that this equates to all the assets and profits of the company belonging to the company and not any person involved with it, no matter their role or power.
The main issue for a client to be aware of is that you can not take money out of the business and fail to give it back. This happens more often that you would imagine, and it is not always done maliciously. Examples are directors spending company money for their own personal use ranging from social evenings out to buying houses!
However, directors can still fall foul if the money was used for a genuine need, such a covering an unexpected bill, if it is not paid back. This often happens if small sized, often family run businesses where a long- standing director is the de facto managing director of the company to such a degree to that they feel like it is theirs.
The issue is often that the company and themselves become one in their minds. The line between the companies needs and the directors needs quickly become blurred.
A director’s loan is money that a director is entitled to take from a company that is not classed as salary, dividend, or legitimate business expense. A director is recorded as a debtor in the accounts and therefore any money that is taken out forms a debt to the company and must be paid back. Directors must ensure that all money is paid back to the Company within 9 months and one day. Directors loan accounts become overdrawn when more money is taken out by the director, than is paid back to the company. If any directors are reading this who find themselves more than£10,000 overdrawn, please seek advice from a tax expert immediately
Directors can be made to pay back money they owe the company, even if it enters liquidation. An abuse of a director’s loan account may also be sufficient grounds to remove them from their directorship. Therefore, it is imperative that all directors of a company should ensure they keep on top of their finances within the company, especially if they are looking to take action against a fellow director.