My company owes me money – this is a common question face by company directors when the directors are face with a directors loan account in credit. Your Director’s Loan Account is a vital component of your company’s accounting system, as it records money that you pay into the business and funds taken out. This type of account must be kept in place because limited companies are distinct legal entities separate from its owners/directors.
When you first established the business, you may have inputted a capital payment from your own personal funds. This is documented in the Director’s Loan Account, along with any other smaller expense items that were paid for out-of-pocket. These transactions are treated as if they are a loan to the business, and under most circumstances, you can anticipate receiving the money back at some point.
But what if the company begins to experience financial hardship, or is already insolvent? Can you still receive your initial investment and any other cash contributions made by yourself?
Where do directors rank amongst other creditors in terms of priority?
As a director of a limited company, it is your responsibility to take into consideration the interests of all creditors if you believe that insolvency might be on the horizon. In this scenario, shareholders are last in line for payment should liquidation become necessary.
If you neglect your duties, it could result in serious repercussions during an insolvency investigation. Directors of limited companies are expected to be cognizant of their company’s financial standing and make decisions accordingly. By having the capacity to affect a business’ cash flow and expenditure when solvent, directors will often find themselves towards the bottom of creditor hierarchy with little left after preferential creditors have been paid off. To avoid being placed at this disadvantageous position, take heed that there is responsibility involved in managing any venture!
Consequently, it is essential for directors to hold themselves accountable for ensuring the financial well-being of the business in order to protect their own investments and that of others.
What should you do if the company starts to fall behind on payments
As a director, it is critical that you take action if the company cannot make payments to suppliers, payroll, tax or utility bills. Seeking advice from an experienced insolvency specialist should be one of your top priorities in order to prevent further financial hardship and maintain solvency.
Although the purpose of an IP is usually viewed as a last-resort measure when a company appears to be in dire straits, enlisting the aid of professional insolvency practitioners early on can often prevent having to dissolve your business.
By making a few clever alterations to your expenditures, you can make the most of the money you have and get yourself out of a tricky situation. Even if all efforts fail and your company is forced into formal insolvency proceedings, rest assured that you took the right steps in protecting your creditors’ interests.
Entering insolvency
If your business is in financial distress, there are a number of recovery solutions available to you such as Company Voluntary Arrangement or pre-pack administration. Your personal capital that has been invested into the company will not be at risk unless the company enters liquidation, meaning all debtors would be paid before directors and shareholders.
When your organization is financially unstable, you must take caution while dealing with the Director’s Loan Account. Any money taken out during this time will be investigated and potentially need to be refunded if it is found that other creditors were not reimbursed due to these payments. To avoid any further complications, make sure all funds are properly accounted for!
When you enter insolvency, the insolvency practitioner or liquidator will closely examine your transactions as far back as two years prior. As a director, if anything suspicious is found during this process, you may be subjected to severe penalties.
Should you be found in violation of your duties as a director, the repercussions could include an indefinite disqualification from holding office for up to fifteen years, financial penalties and even criminal prosecution leading to prison.
A loan to the business – My company owes me money
In the company accounts, the original capital payment and any other large cash inputs are processed accordingly. Your business owes you money just as it does its suppliers, trade creditors, customers and HMRC.
As a director, you are in the same predicament as any other creditor if your market values drop or a major customer leaves. Despite this being an inevitable risk of trading, it still is not ideal to be amongst the last creditors repaid when liquidation occurs. If you want guidance on insolvency matters or need to advise us about potential cash flow issues, we can arrange for no-cost consultation today!
