Directors are often advised to draw funds out of their company by way of dividend, rather than salary, for tax reasons. Funds are drawn over the course of the year and a dividend is paid at the end of the year clearing the overdrawn loan account – simple. However, dividends can only be paid out of profits – no profits, no dividends.
If no dividend, or insufficient dividends are paid, the director remains liable to the company to pay back the funds taken. This is no real problem if there has simply been a blip in trading and will be restored over a short period of time, but causes a big problem should the Company be forced into formal insolvency.
The Insolvency Practitioner will be knocking on your door requesting repayment of the amount outstanding – and I am sorry, you cannot claim that “it is really my salary”. Whilst your argument may have merit to you, and you will have some sympathy from the Insolvency Practitioner who knows exactly what you mean, the strict legal position is that it has not been drawn as salary and you are liable.
Call us to discuss your situation and we will do our very best on your behalf.