Specialist Insolvency Dispute Lawyers
Being a director of an SME is not a straightforward business. Pay is often taken in the form of drawings that are capable of being converted to dividends should circumstances allow it.
There can often be tax advantages to being taxed upon receipt of dividend income.
However, an insolvency situation may arise before drawings are converted to dividends.
If the company went to go into insolvency an Insolvency Practitioner may ask a director to repay these sums. When drawings are taken from company it will create a debit in a directors Loan account. This creates a debt obligation from the director to the company.
The debt is often extinguished when the director declares a dividend arising from the profits of the company.
However, in there are circumstances in which the dividend may be found to be unlawfully declared such as where the company did not have sufficient distributable profits to permit a dividend to be made, or the administrative formalities associated with declaring a dividend have not been complied with.
A director ought to carefully consider their position where they are being questioned about an apparent outstanding directors loan account as the first response can often be decisive.