Brett Barton
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Directors' remuneration - caution required
21st January 2010 14:14
As UK industries continue to endure the recession and with increasing levels of debt, it may be worthwhile considering the method by which directors of owner managed businesses draw their remuneration. It is likely that a director/shareholder will be advised to take a nominal salary and for the balance to be topped up by way of dividends. In the good times this does not create any problems as there are sufficient profits generated to allow the dividends to be paid. The question is what happens if the profits are not there?
If the company fails and goes into liquidation, it is likely that any dividends that have been declared will be reviewed to ascertain that the rules have been properly followed. The common problem is that quite simply, any monies drawn where there are not sufficient profits or distributable reserves are unlawful and will need to be repaid to the company.
Remember what a dividend is, it is a distribution (reduction) of the company’s capital to its shareholders. The effect of a dividend declaration inevitably is that the company’s creditors will have less reserves available to discharge the debts due to them, if ultimately the company runs into financial trouble. The precise rules on dividends, whilst not uncomplicated, do start from the premise that creditors should be protected from shareholders taking excessive dividends to their detriment.
As a consequence, the rules on dividends require certain procedures to be vigorously followed largely without exception. It is not permitted to draw money from a company as a director and then after the event determine that the same was a dividend payment. You must declare the dividend first and then follow all the correct procedures when doing so before making the payments.
For those companies that are struggling with debt and are facing financial difficulties, as directors you need to be careful how you draw your remuneration and remember do not backdate your dividends. It may be that you have to draw your salary under the PAYE regime until the company returns to more profitable times.
