What To Do When Your Company Owes You Money?

What can I do if my employer owes me money?

If you’ve loaned your company money, it’s seen as a director’s loan, and you’re considered a creditor of the business. If the company can’t repay the money you’ve lent, and it goes into liquidation, as a director, you’ll be low in the hierarchy to get payment from company assets.

What to do when a director is owed money by their company? 

A Director’s Loan Account keeps track of money you put into your company and money you take out. It’s part of your company’s accounting system and is necessary because a limited company is legally separate from its owners/directors.

When starting the business, you might have invested your own funds as a capital payment. This is recorded in the Director’s Loan Account, along with smaller personal payments for expenses. 

These transactions are seen as loans to the business, and typically, you can anticipate getting the money back at some point.

However, if the company faces financial difficulties or has become insolvent, accessing the initial capital payment and any other cash inputs from your funds may pose challenges.

What is the position of directors in the creditor hierarchy?

In liquidation, shareholders of a limited company are the final creditors to be paid. As a director, if you suspect the company might be nearing insolvency, you’re obligated to act in the best interests of all creditors.

Not fulfilling this duty can lead to severe consequences during insolvency investigations. Directors of limited companies are expected to be aware of and comprehend their company’s financial status at all times, and respond appropriately.

As you can influence your company’s cash flow and spending while solvent, your place in the creditor hierarchy is typically low. There’s often little money remaining after the secured and other preferential creditors have received payment.

Directors must take responsibility for company finances to protect their own and others’ investments in the business.

Read More: 

• Can I resign as a director but keep my shares in the company
• Can I run my UK limited company from abroad
• What does business liquidity mean
• What to do if you cannot afford to liquidate your insolvent company
• Retention of Title – How does company insolvency affect this

 

What steps to take if the company begins to lag in payments? 

As a director, it’s crucial to take action to prevent further deterioration in the company’s ability to pay, whether it’s payments to suppliers, payroll, tax, or utility bills. This should involve seeking professional advice from a licensed insolvency practitioner.

Many believe that Insolvency Practitioners (IPs) are only there to offer assistance when a situation seems irreparable. However, by consulting a professional firm sooner rather than later, you can often prevent the worst-case scenario of having to wind up the company.

With a few straightforward adjustments to spending, you might find that you can optimise the cash you have and steer your way out of trouble. If not, and the company becomes formally insolvent, you have acted appropriately and in the best interests of your creditors.

1. By entering insolvency

Several recovery options might suit your business, ranging from a Company Voluntary Arrangement to a pre-pack administration. Your personal funds invested in the business aren’t automatically at risk unless the company goes into liquidation, at which point all other creditors will be repaid before directors/shareholders.

It’s crucial to be cautious with how you manage your Director’s Loan Account, especially when the company is facing financial difficulties. 

If you withdraw any money now, we’ll check the transactions. If we find that other creditors haven’t been paid because you paid yourself, you may have to repay the money.

The insolvency practitioner or liquidator will investigate transactions, possibly up to two years before you enter insolvency. As a director, you could face significant penalties if any irregularities are discovered.

In the most severe cases, you could face disqualification as a director for up to 15 years, financial penalties, and even imprisonment.

2. Through a loan to the business

This is how the initial capital payment and any significant cash inputs are handled in the company accounts. Your business owes you money, similar to how it owes suppliers, trade creditors, customers, and HMRC.

In a sense, you’re a creditor like any other and face financial risk if the market declines or if you lose a key customer. These are inherent risks of trading, but being among the last creditors to be repaid if the company is liquidated is an unfortunate aspect of directorship.

If you require advice on any insolvency matter or wish to discuss potential cash flow issues, we can schedule a same-day meeting at no cost.