Directors of owner managed businesses often draw money out of their companies, intending it to be remuneration without apparently realising the gamble they may have taken when things go wrong. The punt is that when remuneration is wrongly drawn they may at sometime in the future have to pay these drawings back to the company, for example on the request of a future Liquidator or some other successor.

The incorrect belief of many directors is that they have an absolute entitlement to the monies they draw from their companies. However, unless express provision has been made within the company’s Articles of Association for the directors to be remunerated, then the case of Guinness plc v Saunders [1990] 2 AC 663 evidences that they have no entitlement whatsoever to receive any salary at all.

It may seem harsh but the reality is in such circumstances where there is no express provision in the Articles, that the fruits of such a director’s labour can only be rewarded via their ability as shareholders to take dividends. Drawing dividends has its own issues as they are strictly subject to the existence of sufficient distributable reserves and implementation of the proper procedures for declaring the same.

Unfortunately for many directors the drawing of monies from a company during a financial year results in their loan account becoming overdrawn. Consequently the regrettable temptation to backdate a dividend to clear an overdrawn account can arise but also can lead to problems later as the same is ultra vires and not permitted. The case of First Global Media Group Limted v Larkin [2003] EWCA Civ 1765 demonstrates that directors cannot take monies in advance of dividend declarations and then later claim the drawings were in fact dividends.

So if you do want your trip to the roulette table to result in the banker winning all the time my recommendation is to ensure that you take professional advice on all matters of remuneration and be mindful of how you might draw the same. Certainly do not backdate dividends or documents to try to legitimise ultra vires acts. After all this is simply not your Saturday night punt on red or black, this is your livelihood.

This entry was posted on Friday, February 26th, 2010 at 5:01 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.