An investigation into the behaviour of the directors of a collapsed Northumberland furniture retailer should be a reminder to North East business owners of the need to comply with their directors’ duties – and the potential personal and commercial consequences of not doing so.
That’s the view of Alexandra Withers, North East vice chair of insolvency and restructuring trade body R3, after a number of creditors of Dickinsons Furnishers asked the administrators appointed to manage its insolvency to investigate the conduct of the directors at the helm of the business in the run up to its failure.
And she is also highlighting the importance for company directors of reviewing the way in which they’re paid in order to prevent potential future problems if their businesses hit financial difficulties.
A significant proportion of directors of limited companies take an income in dividends, rather than as straightforward salary, which means they are subject to lower rates of corporation tax, instead of income tax.
These dividends must be drawn from the company’s ‘distributable reserves,’ which are comprised of the difference between the company’s accumulated realised profits and its accumulated realised losses.
But if the firm’s trading performance worsens, these reserves might eventually be used up, meaning any dividends drawn in such a way would not have been done so legitimately.
Alexandra Withers, who is an Associate Solicitor in the Insolvency department of Short Richardson & Forth Solicitors, says: “If any company becomes insolvent, the insolvency practitioner appointed over it has a duty to look at the directors’ conduct and also whether there are unlawful directors’ dividends that should be repaid, as part of maximising the monies available with which to pay creditors.
“In terms of taking money out of a company, making dividend payments instead of taking a standard salary is common practice for company directors, but this approach could create serious problems for individuals whose businesses become insolvent, problems which would be piled on top of everything else associated with this happening.
“While straightforward salary payments are unlikely be targeted, dividend payments would very much be in an insolvency practitioner’s sights should they have been taken from reserves that did not exist.
“There is always an element of forecasting which goes into the availability of funds for dividend payments, but directors have to be more stringent in their financial planning today than ever before, or risk the personal and commercial consequences.
“While it is obviously less tax efficient to take a salary, if company directors have any concerns about the continued availability of distributable reserves for a given financial year, the safest course of action would be to opt to take a salary and to then regularly review how the business is performing.”