A recent case has highlighted a potential area of risk which could catch directors out – where dividends can be treated as a loan in an insolvency procedure.
In the case of M Electrical Solutions Ltd & Anor v Belcher 2020, there were payments made to a Director/Shareholder which were recorded as dividend payments in the company’s accounting software. However, the dividend payment was not formally declared – i.e. in board meeting minutes. What did this mean?
This resulted in the Court declaring:
- that the payments to the Director be treated as a loan, which was therefore repayable in the liquidation
- that the Director could not argue it should be treated as a dividend without evidence that a dividend had lawfully been declared
Official record of a dividend payment
Had the dividend formally been declared then it would have to be treated as such. An official record in order to pay a dividend means you must:
- hold a directors’ meeting to ‘declare’ the dividend
- keep minutes of the meeting, even if you’re the only director
Each dividend payment the company makes must also be documented in the form of a dividend voucher. This must show:
- the date
- company name
- names of the shareholders being paid a dividend
- amount of the dividend
Both the recipient of the dividend and the company must keep a copy of the dividend voucher for their records.
Remember, tax only gets paid on a dividend payment if it is above the personal allowance of £2,000. You can find more information on tax on dividends here.
What happens when a company goes into insolvency proceedings and the director’s loan account is overdrawn?
When a director takes money out of the business which is not through PAYE or dividend payments, then this is recorded as a transaction in the director’s loan account. If it is overdrawn when a company goes into a form of insolvency proceedings, then the director essentially becomes a debtor to the company and the insolvency practitioner will look to recover that debt for the benefit of the creditors.
Director’s Loan Accounts 101: Borrowing money from your company.
What if I can’t repay my director’s loan account?
Once in an insolvency procedure such as company liquidation, the appointed insolvency practitioner has a duty to recover all debts in order to repay the creditors. Just because you are a director of the company doesn’t mean you will be exempt from repaying your debt.
Where necessary they will take legal action to make directors repay and this could potentially lead to personal bankruptcy.
If you have concerns that your director’s loan account is overdrawn or that you would struggle to repay the amount you have borrowed, then talk to us and we can help you to review your options. Call 0808 1644 222 or email help@hjsrecovery.co.uk.
The post When dividends CAN be treated as a loan in insolvency proceedings – Don’t get caught out. appeared first on HJS Recovery (UK) Ltd.
