Reviewed: 29th March 2016
The ‘separate legal entity’ status of your limited company means that any investment you’ve made from personal funds is considered a loan to the business. This also includes smaller deposits of cash, and any money used to buy business assets.
All transactions are recorded in the books, and itemised within the Director’s Loan Account. But what if the company fails and you become a creditor of your own business?
If your business gets into financial difficulty and has to be liquidated, you’ll need to place a claim with the liquidator as an unsecured creditor. Don’t be tempted to withdraw your money or transfer any assets before the company formally enters insolvency, as your conduct as a director will be investigated and you could even face criminal charges for fraud.
Unfortunately, unsecured creditors take a low position in the hierarchy for payment, and there’s no guarantee that you will recover any of your investment. The liquidator will give you a form to register the claim, and you’ll need proof that the debt exists, which in this case will be the transactions documented in the Director’s Loan Account.
The appointed liquidator will sell all business assets, distributing the funds between creditors in this order:
Although you rank near the bottom of the list for repayment of your investment, your status as a company employee means that you’re a preferential creditor for receipt of salary arrears, redundancy, and other payments up to a statutory limit currently standing at £475 per week.
You could be eligible for up to eight weeks’ salary, up to six weeks’ holiday pay, plus redundancy pay (subject to specific criteria). If there are insufficient funds to repay you from company assets, you can apply to the National Insurance Fund (NIF).
These claims are made using form RP1 and are sent via the Redundancy Payments Service, who manage the National Insurance Fund.
If you’ve been a director of the company for two years or more, you may be entitled to claim redundancy pay within six months of the date of liquidation. How much you’re entitled to depends on your age, salary, and length of time at the company. There’s a maximum limit of 20 years’ service, and the limit of statutory redundancy pay is currently set at £14,250.
If the business goes into liquidation:
Real Business Rescue can guide you on your rights as the director of a liquidated company. We’ll ensure you know how to claim what is owed to you, and that you understand the liquidation procedure from beginning to end.
Our team of insolvency experts operate throughout the country, and provide impartial, confidential advice. With 55 offices across the UK, you’re never far away from expert and confidential advice.
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