What To Do When Your Company Owes You Money

What happens when a director is owed money by their company?

A directors' loan account records incoming and outgoing business transactions and forms part of your company’s accounting system. These transactions include any funds you or your fellow directors pay in or extract from the company that are not classed as salary or dividends.

When you set up the company, you may have invested a capital payment from your own funds to kick start the business. This is documented in the director’s loan account, along with any other personal payments for smaller expense items. These transactions are treated as a loan to the business, and under normal circumstances you can expect to receive the monies back at some stage.

But what happens if the company starts to struggle financially, or has already become insolvent? Can you still gain access to the original capital payment, and any other investments of personal money into the business?

Directors as creditors of their company

The original capital payment as well as any other large cash inputs are treated in the company accounts as a loan to the business; in this respect you are classed as a creditor of the company. Essentially, your business owes you money just as it does suppliers, trade creditors, customers and HMRC.

As a creditor you are at risk financially if the company takes a downturn and its finances become strained. When a company is liquidated, creditors are repaid as per a set heirarchy as laid out in the Insolvency Act 1986.

What happens to directors loans during liquidation?

Shareholders of a limited company are the last group of creditors to receive payment in liquidation. Shareholders rank below secured creditors, preferential creditors (including employees and some HMRC arrears), as well as unsecured creditors.

Unfortunately, by the time it comes to the shareholders turn to be repaid from company assets, there will not be any money left after secured and other preferential creditors have been paid in the event of an insolvent liquidation. It is imperative, therefore, that directors take responsibility for company finances to safeguard their own as well as creditors' investment in the business.

“Called for help with closing non-trading companies and Chelsea advised me on what to do and instead of taking advantage as others would by taking on the case and charging loads. She gave me a solution that would cost £20. Very pleased with the service and thankful for Chelsea’s advice.”

AB

 

Contact the Real Business Rescue Team today

Chelsea Williams
Business Debt Expert

What should you do if the company starts to fall behind on payments

Whether it’s payments to suppliers, payroll, tax or utility bills, as a director you must take action to stop any further decline in the company’s ability to pay its liabilities. This should include seeking professional guidance from a licensed insolvency practitioner at the earliest signs of company insolvency.

It is commonly thought that insolvency practitioners are there simply to provide practical help when a situation seems beyond repair, but by approaching an insolvency expert sooner than later you can often avoid the worst case scenario of having a creditor wind-up the company.

You may find that with a few simple adjustments to spending, you can maximise the cash you have and navigate your way out of trouble. If not, and the company enters formal insolvency proceedings, you can rest assured that you have acted in the correct manner and in the interests of your creditors.

Get a Quote Find Your Nearest Office

Directors loans to company and insolvency

There is a need to be careful how you operate your director’s loan account, particularly when the company is struggling financially. If you take any money out during this time, the transactions will be investigated and may have to be repaid if it is found that other creditors have been denied monies because you have paid yourself. This is the case even if the company owes you money; you cannot pay yourself above other creditors who are also owed money by your company.

Following the company entering into formal insolvency proceedings, such as liquidation, all transactions will be scrutinised by the appointed insolvency practitioner, potentially up to two years prior to the date you entered into formal insolvency proceedings, and as a director you could receive severe penalties if any misconduct is found.

You could face disqualification as a director for up to 15 years, be given financial penalties, and in the most serious of cases receive a prison sentence.

If you need advice on any aspect of company insolvency, or wish to talk to us with regarding any potential cash flow problems, our expert team are here to help. Call our team of licensed insolvency practitioners and business turnaround experts on 0800 644 6080.