The importance of remuneration planning in unprecedented times

It is commonplace for SME business owners, where the directors and shareholders are one and the same, to pay themselves a small salary and then take the balance of their remuneration by way of drawings.

Dividends are then subsequently declared to clear the overdrawn director's loan account, provided there are distributable reserves.

This has been recognised practice for some time, especially in smaller companies.

When businesses are performing well and there are distributable reserves, and hence dividends are permitted, this works perfectly well - provided due process is followed.

However, when businesses take a turn for the worse and dividends cannot be declared, or should not have been declared, director shareholders are left exposed because their loan accounts remain overdrawn.

This is one of the most common issues we come across in insolvency proceedings.

In most situations, the business will have entered into an insolvency procedure with the director shareholder remaining indebted to the Company.

The Insolvency Practitioner has a legal obligation to then recover those funds for the benefit of Company creditors.

In other situations, dividends may have been declared prior to insolvency, at a time when it was plainly obvious that the Company was insolvent, in which case the dividends were unlawful.

Shareholders are then liable for repaying the dividends, and directors are at risk of action for breaching their fiduciary duties.

As companies continue to navigate through these unprecedented times, and as the risk of failure sadly heightens for some, it is vitally important that remuneration planning is properly thought out.

In particular, it is important to ensure the structure is appropriate (wages vs dividends), due consideration is given to the wider financial situation when dividends are proposed, and, just as importantly, there is clarity as to what happens when things go wrong, so that director shareholders can make informed decisions.

In Restructuring we can help you with these decisions in the context of the bigger picture around contingency planning, financial review etc.

Please contact us to discuss your situation to see how we can help.