Reply to: resigning a directorship

[northernladuk]

Thanks everyone for the feedback.

The expenses part of this makes good sense, I will take that on board.

On the salary part: can a company employee determine to take their own salary, and also the amount that they are paid every month? Surely, once a director has resigned and reduced himself/herself to the status of employee, then this person must negotiate anew any salary payments and amount with the remaining company officer(s).

You'd think so if everything was done properly. She would need a contract of employment and be paid at least the National Minimum wage. If she is no longer an officer or director of the company and paying herself less than NMW then the company would be breaking the law surely? That's just the start of it I would have thought.

[greene]

Thanks everyone for the feedback.

The expenses part of this makes good sense, I will take that on board.

On the salary part: can a company employee determine to take their own salary, and also the amount that they are paid every month? Surely, once a director has resigned and reduced himself/herself to the status of employee, then this person must negotiate anew any salary payments and amount with the remaining company officer(s).

[SueEllen]

The expenses might be problematic as they have to be wholly and exclusively. If she's not been working at clients she can only claim things she's paid for whilst looking for work or maintaining the company. She can't be claiming lunches as there is no client but she might be able to claim printer ink or mobile costs. I'd be wanting to go through her expenses with a fine toothed comb to make sure she isn't taking the piss.

Not strictly true.

If there are potential clients - this she needs to back up with emails or letters showing meetings - then she can claim some lunches either as a business expense due to travelling, or as entertainment if she has a meeting with the potential client over a meal. She can also claim travel expenses to these meetings.

However as she has taken money out of the company without telling the OP then just request that she justifies every single expense. If she then comes back and says I was travelling to y see xx as potential client and the entire travel and meeting took 6 hours then ask for proof of the meeting. If there is no proof the meeting didn't happen. She can falsify the proof but let's not go there.

[northernladuk]

On a separate note, she continued to take a salary and a monthly business expense until June of this year despite not bringing any revenue into the company for well over a year before that date. I'm not sure there is a law against that, but I am wondering if either of these two items were allowable without my approval as director? (I will shortly be getting legal advice and will presumably get my answer, nevertheless I am still interested in the views of the smart folk on here.)

She could be working for the company but not bringing any revenue in, like a shopkeeper with an empty shop. When I'm on the bench I'm not bringing any money in but I'm working for the company to try and change that. If you agreed she can have x per month and nothing changed then why wouldn't she continue to draw it?

The expenses might be problematic as they have to be wholly and exclusively. If she's not been working at clients she can only claim things she's paid for whilst looking for work or maintaining the company. She can't be claiming lunches as there is no client but she might be able to claim printer ink or mobile costs. I'd be wanting to go through her expenses with a fine toothed comb to make sure she isn't taking the piss.

[TheFaQQer]

On a separate note, she continued to take a salary and a monthly business expense until June of this year despite not bringing any revenue into the company for well over a year before that date. I'm not sure there is a law against that, but I am wondering if either of these two items were allowable without my approval as director? (I will shortly be getting legal advice and will presumably get my answer, nevertheless I am still interested in the views of the smart folk on here.)

If every director is needed for every decision, then businesses grind to a halt. When I was benched for several months, I continued to get paid and I continued to incur expenses.

As an officer of the company, I'd be surprised if there is anything illegal about being paid when you aren't bringing money in - if there was then every non-executive director in the country would be in breach of that law.

[greene]

If I were in this situation, I'd probably ask my accountant to write the former director a letter stating that if they do not justify every payment to their account and fully cooperate in reconstructing accurate accounts, the matter will be reported to the authorities as possible embezzlement. And then, if there isn't cooperation, that's what I'd do.

Just a quick update. I've appointed an accountant to pick things up from here and they will be contacting my former co-director for her justification of disbursements actioned without my approval. There is one for around 5K, presumably either a dividend or an expense. I don't see how she can justify that without evidence that it was approved by a director - which it was not. Anyway, the accountant is on it and fully apprised of the situation.

On a separate note, she continued to take a salary and a monthly business expense until June of this year despite not bringing any revenue into the company for well over a year before that date. I'm not sure there is a law against that, but I am wondering if either of these two items were allowable without my approval as director? (I will shortly be getting legal advice and will presumably get my answer, nevertheless I am still interested in the views of the smart folk on here.)

[LondonManc]

Yes, but I think the payments were all made to his co director. His point was he didn't know whether they were for divi's, expenses etc

Totally agree and I was pointing out that it's easy to check where they've gone.

WordIsBond's excellent reply can then be used to sort out the why.

[greene]

If I were in this situation, I'd probably ask my accountant to write the former director a letter stating that if they do not justify every payment to their account and fully cooperate in reconstructing accurate accounts, the matter will be reported to the authorities as possible embezzlement. And then, if there isn't cooperation, that's what I'd do.

There was no dividend if it wasn't authorised by directors. There is no expense payment for which the company does not have records justifying the expense payment. There is no director's loan which hasn't been approved by the directors, and there is no director's loan for someone who isn't a director anyway. So any funds paid out to your former partner which are not dividends, not expenses, and not director's loans were fraudulently obtained.

That would not be a matter for HMRC, that would be a matter for the police. So your accountant may end up having to tell HMRC that there has been embezzlement and fraudulently filed accounts, and you are trying to sort it all out. They will still want their money but presumably they'll give you enough time to figure things out.

Thanks - seems like excellent advice.

[WordIsBond]

If I were in this situation, I'd probably ask my accountant to write the former director a letter stating that if they do not justify every payment to their account and fully cooperate in reconstructing accurate accounts, the matter will be reported to the authorities as possible embezzlement. And then, if there isn't cooperation, that's what I'd do.

There was no dividend if it wasn't authorised by directors. There is no expense payment for which the company does not have records justifying the expense payment. There is no director's loan which hasn't been approved by the directors, and there is no director's loan for someone who isn't a director anyway. So any funds paid out to your former partner which are not dividends, not expenses, and not director's loans were fraudulently obtained.

That would not be a matter for HMRC, that would be a matter for the police. So your accountant may end up having to tell HMRC that there has been embezzlement and fraudulently filed accounts, and you are trying to sort it all out. They will still want their money but presumably they'll give you enough time to figure things out.

[greene]

Yes, but I think the payments were all made to his co director. His point was he didn't know whether they were for divi's, expenses etc

Yes, that's it.

I have all the sort codes, card numbers, etc, and all the paper bank statements for the last ten years, it's just that I don't have clarity on what exactly the outgoings match up to. I can make an educated guess but it will not always be correct.

I am actually starting to wonder how beneficial it is for me to 'do the right thing', i.e. be diligent and create a correct set of accounts. What this does in effect is to give HMRC a precise figure to come after me for, as the remaining director.

I had believed that HMRC would be balanced and would split the accountability across myself and my erstwhile co-director, but having reached out to people who I know with some experience of HMRC, I have been told that they (HMRC) are less concerned about where or whom the money arrives from, so long as they get it. And if I am the only person communicating and playing ball, as it were, then the easy option is to come after me.

Pie in the sky, perhaps, but what I would really like is for HMRC to take the initiative and investigate what I believe to be malpractice. Perhaps reporting that I am struggling to create correct and accurate accounts (which is the truth) might encourage HMRC to investigate the company.

Ideally I would like to avoid the courts, given the cost aspect and given that there is no guarantee that I will get my desired outcome. But if HMRC aren't going to be proactive, and my ex-colleague continues to ignore me, then maybe that is my only and last resort.

[simondolan]

The payments out should be just as traceable - every account/facility has a sort code and account number. At the very least, Greene should be able to request the last 2-3 years bank statements (if they cannot access them online) and see if these acc/sorts are recurring or not.

Yes, but I think the payments were all made to his co director. His point was he didn't know whether they were for divi's, expenses etc

[LondonManc]

The credit in should be easy - the bank will tell you who it is from, and then common sense should indicate what it is for. The payments out presumably then are all to the co director in one way or another. If dividends they should be easy to identify as you will have taken a pro rata amount based on your shareholding. You are then left with either a loan or expenses. Assuming you know what they have invoiced out, you should be able to make a good stab at estimating what the expenses would have been. Balance you'd put to their loan account. Send them a copy of the draft accounts by recorded delivery and email and ask for their comments. In the absence of a response, assume them to have agreed and submit the finals.

The payments out should be just as traceable - every account/facility has a sort code and account number. At the very least, Greene should be able to request the last 2-3 years bank statements (if they cannot access them online) and see if these acc/sorts are recurring or not.

[simondolan]

Hi Simon

Thanks for the reply.

The problem I have is that there are bank entries that do not relate to my own invoicing, expenses, etc. They relate to the activities of my former co-director.

For instance, a bank withdrawal on their part could be a loan, an expense, a dividend. Similarly, there is at least one credit into the bank account which is not obviously an invoice.

Sorry for not being clearer earlier.

My choices seem to be:
1) work with an accountant and have a good stab at it
2) speak to HMRC about the situation and see if they recommend any other approach

greene

The credit in should be easy - the bank will tell you who it is from, and then common sense should indicate what it is for. The payments out presumably then are all to the co director in one way or another. If dividends they should be easy to identify as you will have taken a pro rata amount based on your shareholding. You are then left with either a loan or expenses. Assuming you know what they have invoiced out, you should be able to make a good stab at estimating what the expenses would have been. Balance you'd put to their loan account. Send them a copy of the draft accounts by recorded delivery and email and ask for their comments. In the absence of a response, assume them to have agreed and submit the finals.

[LondonManc]

Hi LondonManc

Thanks for responding.

This has been done already on more than one occasion in recent weeks and no response has been forthcoming. It was my preferred resolution to the situation (and still is).

greene

Looks like it's the accounting and legal route then.

Good luck - it's certainly not a nice position that you're in. I've read the rest of the thread and the combined advise looks spot on.

The concerning parts of this are the fraud and the potential that they've withdrawn more from the account than they were entitled to.

[greene]

If you've not fallen out with the other director and simply drifted apart, advise them that you have seen a copy of the accounts and it doesn't balance back to what your sums are so you'd like to see their transactions.

Hi LondonManc

Thanks for responding.

This has been done already on more than one occasion in recent weeks and no response has been forthcoming. It was my preferred resolution to the situation (and still is).

greene