Can-I-take-money-out-of-an-insolvent-limited-company

Can I take money from an insolvent company?

If your business is facing financial trouble, you should stop trading right away. Keep all company funds and use them to pay back creditors.

 If your business can’t pay its debts and you take money out, you might get fined, become personally responsible for the debts, or get banned from being a company director.

 

Is it advisable to withdraw money from my struggling business?

Withdrawing money from a struggling business could lead to serious problems if the company goes insolvent later on. 

Some directors may try to get back the money owed to them, even if it means hurting other creditors. However, this could be seen as fraud if there’s an investigation.

When a company goes insolvent, the appointed office-holder examines the actions of all directors before insolvency for instances of wrongful or unlawful trading and unfit conduct.

If it’s discovered that you’ve taken money out of the business, regardless of whether the withdrawal caused insolvency, you might be held responsible for some or all of the company’s debts. You could also be disqualified as a director.

 

What to do if my company is solvent?

Even if your company is financially stable, dividends can only be paid if there are enough retained profits to cover them. If you declare an unauthorised dividend, it indicates trading while insolvent – your director’s loan account may go into overdraft, leading to potential investigation for unlawful trading.

Another factor to consider is whether your business is truly solvent. Despite your belief that it is when you withdraw money, it might be ‘balance sheet insolvent.’

This situation arises when your liabilities are underestimated, or the company’s assets are inaccurately valued. For instance, the debtor figure might be too high, or older stock might have depreciated but is recorded at the full market price.

 

Exploring the potential drawbacks when you withdraw money from an insolvent company

Preferential payments might occur unintentionally if you’re genuinely unaware of the company’s financial status or don’t grasp the implications of your actions. 

However, as a director, you are legally obligated to understand the business’s financial position and prioritise creditor interests.

What exactly is a preference? When you pay one creditor over others or transfer assets to them, you put other unsecured creditors at a disadvantage. This diminishes the total amount available to the entire group.

If a liquidator identifies preferential payments, the courts can overturn them if your business later becomes insolvent.

Moreover, if other creditors are informed of your company’s financial status and the preferential payment you’ve made, they’re more inclined to initiate their own legal actions against the company.

As a director, you can face legal action for making preferential payments and may be held responsible for some of the company’s debts as a consequence. That’s why it’s crucial to comprehend your business figures and seek professional assistance if there’s any uncertainty about its financial status.

Director responsibilities in this area are significant. Failing to fulfil your duties as a director could lead to accusations of unfit conduct by a liquidator.

 

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What will be your duty as a creditor of your own company? 

If you’ve provided an unsecured loan to your company, you will be on the same level as other unsecured creditors when it comes to repayment. This implies that you’ll need to wait until secured and preferential creditors are paid first.

Occasionally, a director also serves as an employee of the company. In such instances, you’ll have a higher priority for arrears of wages and other payroll payments, up to a statutory limit, as a preferential creditor.

Shareholders will only receive payment after all other creditor groups have been fully repaid, along with interest.

Vanguard Insolvency can assist if your company is facing difficulties and you’re uncertain about your obligations. We can assess whether the business is truly solvent and guide recovery or restructuring options.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.