By Tim Corfield.
Often when I ask a director (who is also a shareholder) about his 'remuneration package' he says that it’s made up of two elements – an amount of salary just below the national insurance threshold and a monthly dividend. "That’s how my accountant set it up a few years ago" he says.
It is a requirement that dividends are only drawn by reference to 'relevant accounts' as prepared under the Companies Act. There must be a balance sheet and profit and loss account which should have been prepared in accordance with recognised accounting principles. These accounts would show the amount that could be drawn in dividends.
Often, companies will continue to trade and directors will continue to draw dividends without the formality of any 'interim' or management accounts. "My accountant does the accounts after the company year end – that way I don’t incur the cost of any interim accounts".
Of course, most of the time this doesn’t really matter, from a practicable point of view.
Why you should look at your director’s remuneration package.
But, what happens if the company becomes insolvent before the next accounts are due to be prepared? This would mean that the director has not only been drawing dividends in contravention of the Companies Act but also, quite probably, there are no available profits from which to draw dividends. Either way, the director runs the risk that any subsequently appointed liquidator will look to recover these payments.
When a business gets into trading difficulties it’s so important for the directors to understand the financial position of the company – and not just because of dividends. The company accountant becomes more important, not less! Review of the director’s remuneration package would be part of a realistic assessment of the future of the business.
Please call (01922 722205) me (Tim) or Mark Shaw or Janet Peacock for a chat or informal meeting if you think we could help in a particular situation.
We have the day to day experience of dealing with these issues and we will be able to find the right solution – whether it be a formal insolvency appointment or not.
Please view the testimonials of previous clients we have helped.
Griffin & King Insolvency Practitioners have offices throughout the UK including Walsall, Bournemouth, Hereford, Redditch, Shrewsbury and Stoke.