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What to do when your salary and dividend are being looked at

Directors who are also shareholders, often place their company into liquidation in the belief that, if they have not given any personal guarantee of the company’s debts, they are free to walk away without having to contribute to the loss suffered by creditors.  This article explores just one of the ways in which this assumption may prove to be untrue.

It may seem obvious, but a company should not pay a dividend to its shareholders unless it has sufficient profits to do so. This is not always obvious to directors and shareholders and sometimes their advisors who often allow their clients to pay a dividend that leaves a deficit on the company’s reserves. Usually this is not a problem until the company goes into liquidation. A well informed liquidator will, as a matter of course, look back at the company’s statutory accounts filed at Companies House  and identify where dividends have been paid in excess of the reserves available.

Since it is illegal to pay dividends unless there are sufficient reserves, the liquidator will ask the shareholders to repay these unauthorised dividends. Sometimes the directors will attempt, in the months before the liquidation, to draw large salaries from the company rather than to take a dividend in the hope that they can avoid this problem. However a liquidator will usually see through this and one of the alarm bells will be the fact that PAYE/NI have not been paid over to HM Revenue and Customs for several months!

Gore and Company works with directors to assist them during the liquidator’s investigations so that directors are not inadvertently held responsible for what might be legitimate payments. Strong accounting skills as well as a knowledge of the taxation regime are important as well as a detailed knowledge of the insolvency and company legislation.

Interested parties should contact Gore and Company on 0845 602 3620 for further information.

Please note that the above is provided for illustration purposes only and comprises a short view of extremely complex insolvency and other legislation. This is a complicated area and specific advice must be sought before undertaking any course of action or before refraining from any course of action. Gore and Company takes no responsibility for any loss incurred to or by any person who either acts or refrains from acting on the basis of the above or of any other item published on this website. The above note may not be reproduced without the prior written consent of Gore and Company.

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