Limited Company directors loan
Discussion
In a limited company you can use ‘Directors loans’ either for the director to borrow money from the business or put money into the business.
If a director resigns but has an outstanding loan where he/she had put money into the business what is the legal position if they wanted the money back?
Many thanks in advance for your help.
Steve
If a director resigns but has an outstanding loan where he/she had put money into the business what is the legal position if they wanted the money back?
Many thanks in advance for your help.
Steve
The general assumption is that the director/former director is entitled to have the money repaid to them.
However, there are all sorts of scenarios that can develop that could result in them not geting their money back.
What does the company's Memorandum and Articles say about directors' loans?
Is their a separate shareholders' agreement in place?
Can the company currently afford to repay the loan?
However, there are all sorts of scenarios that can develop that could result in them not geting their money back.
What does the company's Memorandum and Articles say about directors' loans?
Is their a separate shareholders' agreement in place?
Can the company currently afford to repay the loan?
Soir said:
Eric, if I take a directors loan do I have to pay it back within 9 months to make sure no charges (assumed tax on it etc)?
Yes - to avoid the penalty Corporation Tax charge on the balance. This used to be referred to as Section 419 tax. The legislation was changed slightly and it is now referred to as Section 455 tax.
However, if the balance exceeded £5,000 at 5 April, it should have been declared as a Beneficial Loan for PAYE purposes and there would be a BIK tax charge arising - collected by menas of an adjustment to your PAYE coding.
If a director has an overdrawn loan account during the financial year, there are reporting requirements regarding the existence of the loan in the formal statutory accounts - even if the loan was repaid within the 9 month post year end window.
Soir said:
Thanks Eric. So if I take £14k loan out of company funds (no bank overdraft) I need to pay it back within 9mths to avoid corp tax, but I will still incur paye tax on the amount (nominal based on interest)
That's it.You do need to be careful about taking money out of your own company. If it is seen as treating yourself as a preferential creditor you could end up in trouble.
And there is the hassle of having to disclose these transactions in the statutory accounts. Your accountant won't thank you for the extra trouble you will be causing him/her.
Eric Mc said:
The general assumption is that the director/former director is entitled to have the money repaid to them.
However, there are all sorts of scenarios that can develop that could result in them not geting their money back.
What does the company's Memorandum and Articles say about directors' loans?
Is their a separate shareholders' agreement in place?
Can the company currently afford to repay the loan?
I don't believe we have 'company's Memorandum and Articles' but I could be wrong.However, there are all sorts of scenarios that can develop that could result in them not geting their money back.
What does the company's Memorandum and Articles say about directors' loans?
Is their a separate shareholders' agreement in place?
Can the company currently afford to repay the loan?
The (current) two directors hold 50% shares each.
The company would not be in a position to repay the loan.
Steve
Eric Mc said:
2 sMoKiN bArReLs said:
All Ltd companies have a mem & arts.
Absolutely.The OP had better find out pretty quick what the Memo and Arts says about such a situation.
There is no mention of directors loans in there.
Steve
Soir said:
I'm thinking of taking £20k out of the company & putting it into personal premium bonds (chance to win something better than the 0% interest rate gained with the bank) then pay it back into the company at 9 months. (pay small amout paye tax on the small interest)
There will still be disclosure requirements in the accounts and a PAYE Benefit in Kind charge.Eric Mc said:
Good.
That means the constitution of the company is silent on such matters.
I don't suppose there was any Shareholders' Agreement in place?
There are shares. Each of the two directors has 5 (£1) shares each.That means the constitution of the company is silent on such matters.
I don't suppose there was any Shareholders' Agreement in place?
The resigning director is going to pass his shares over splitting them between the other director and a new director.
So to reiterate the original question...how will the company stand if the resigning director wants his money back?
Steve
He's entitled to ask for it back.
If he can't have it, he can refuse to sell his shares. He currently owns half the company so can effectively block any move to oust him - including the issuing of new shares to try and dilute his shareholding.
It can all get very messy.
Why can't the company pay him his money?
Do you WAN'T to give him his money?
Is the company viable at all? If it is, will generate suficient funds in the future to let him have his money back at a later date - or pay him over time in instalments?
If he can't have it, he can refuse to sell his shares. He currently owns half the company so can effectively block any move to oust him - including the issuing of new shares to try and dilute his shareholding.
It can all get very messy.
Why can't the company pay him his money?
Do you WAN'T to give him his money?
Is the company viable at all? If it is, will generate suficient funds in the future to let him have his money back at a later date - or pay him over time in instalments?
He wants to leave and knows the company does not have available funds to pay him at this time. It has been agreed that the company will pay back over time.
You have however confirmed that he could claim it back which would likely make the company non viable. I had hoped that being a limited company we would some how be protected from this.
Many thanks for your help.
Steve
You have however confirmed that he could claim it back which would likely make the company non viable. I had hoped that being a limited company we would some how be protected from this.
Many thanks for your help.
Steve
Steve_D said:
He wants to leave and knows the company does not have available funds to pay him at this time. It has been agreed that the company will pay back over time.
You have however confirmed that he could claim it back which would likely make the company non viable. I had hoped that being a limited company we would some how be protected from this.
Many thanks for your help.
Steve
If the company is non-viable purely because it owes money to a director, it does make me wonder whether it is truly viable in the first place.You have however confirmed that he could claim it back which would likely make the company non viable. I had hoped that being a limited company we would some how be protected from this.
Many thanks for your help.
Steve
Maybe the best thing would have been to allow the company to be dissolved and start from scratch on your own or with a new business partner.
Eric Mc said:
If the company is non-viable purely because it owes money to a director, it does make me wonder whether it is truly viable in the first place.
Maybe the best thing would have been to allow the company to be dissolved and start from scratch on your own or with a new business partner.
just because its technically insolvent doesnt mean it's not viable Maybe the best thing would have been to allow the company to be dissolved and start from scratch on your own or with a new business partner.
why should you give the other director his money back. It's like going to a bookie halfway through a race, seeing the horse isn't doing very well and asking for your stake back. (there may of course be undisclosed reasons to do this...)
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