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An overdrawn current account is a significant liability often misunderstood by company directors.
Many mistakenly believe it is akin to a salary, but in reality, it represents a business loan that can be called in at any time. In cases of liquidation, liquidators often target overdrawn current accounts as they are one of the easiest recovery paths for liquidators to take.
This may lead to aggressive recovery actions, including freezing assets to ensure they remain available for liquidation proceedings. It is crucial for directors to seek specialist insolvency advice prior to liquidation, including considering potentially converting the overdrawn shareholder current account into a declared salary to mitigate risks.
Watch the full video to learn more:
A shareholder current account is a record of funds introduced into and withdrawn from a company by a shareholder, who is oftentimes also the company director. The shareholder current account is typically established at the start of a company when shareholders put their own funds into the business as working capital.
There is often a common misperception by directors about what an overdrawn current account is. It’s not a salary. It is a liability. It is a loan that is repayable on demand.
When the shareholder current account becomes overdrawn, you, as the company director and shareholder, owe your company money. And if your company owes funds to a creditor, the shareholder current account is often what the liquidator goes after first.
It makes sense that directors take drawings from shareholder current accounts. It has a convenience to it. You take money for personal expenses when the cash is available, and when it’s not, you don’t.
But you’ve got to know that it is a loan from your company, and it’s repayable on demand.
One of the first things that liquidators do when they are appointed is to go to the accountant and ask for all of the financial records of the company.
They will go to the bank to ask for the bank accounts, and they will reconstruct anything that is not in the financial records.
As soon as they see an overdrawn current account, they send out a letter of demand.
Shareholder current accounts are low-hanging fruit, so liquidators like to take an aggressive approach to them. We’ve seen this occur across countless cases.
For instance, we once acted for a liquidator and issued a demand for a current account balance of $400,000.00. It had been carried over many years, as is often the case, and we went straight to court.
We froze the company director’s assets, froze his home, and froze his bank accounts. We wanted the certainty that when we finally got our day in court—which would be a year, maybe two years later—the assets would still be there and that we’d be able to recover them.
That’s not an uncommon approach.
If you are considering a company liquidation, it is essential that, as part of your pre-liquidation process, you get specialist insolvency advice that addresses things like overdrawn shareholder current accounts.
It may be that you need to declare that as salary properly to get it off the balance sheet and onto the P&L. Yes, there is going to be a difference in income tax that you may need to pay, but that is probably going to be a lot better than having your assets frozen and dealing with an aggressive liquidator.
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Author Profile
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
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