UNLAWFUL PAYMENTS BY LIMITED COMPANIES

One of the advantages of doing business through the medium of a limited company is that in normal circumstances, neither the directors nor the shareholders will incur liability for the debts of the business. This is a particular attraction in the current economic climate when the risks of doing business are enhanced.

However, incorporating a business as a company does have its drawbacks. With incorporation comes a certain lack of flexibility. In the case of a partnership, the partners can decide how the firm's business is to be developed and how its resources are to be deployed. By contrast, a company is a separate legal entity. Each director of the company must act in a way likely to promote the success of the company for the benefit of its members as a whole. One aspect of this rule is that the company's property may only be applied for the company's proper purposes.

Some of the implications of these principles are obvious. Paying for two weeks in the Bahamas for the MD or providing him with a bolthole in Provence will not be a proper use of the company's resources. Other implications can be less easy to spot. It may be that the directors are facing opposition from (as they see it) a stroppy minority shareholder. It is very easy for the directors to confuse their own interests with those of the company. Questions can arise about how far the company should be incurring legal costs in relation to what, in reality, is a dispute between shareholders. Another area which can cause difficulties is where the company is a member of a group, and one or more directors are also directors of the holding company. In such cases, the directors may find that they owe obligations to different companies which can be very difficult to reconcile.

One way out of such difficulties can be to obtain shareholders' consent to a transaction, either beforehand or subsequently. However, this may prove to be impossible. Again particularly in the current economic climate, the possibility of insolvency in mind must be borne in mind. If the company goes bust and a liquidator is appointed, he may decide to bring proceedings against the directors to recover misapplied property. Further, if the Department of Business Enterprise and Regulatory Reform has concerns about how the company has been run, it may bring disqualification proceedings against one or more of the directors. If such proceedings succeed, the director may be prevented from being a director of, or otherwise in the running of, a company for up to 15 years. A blossoming career may be brought to a juddering halt.

If you would like advice as to how to guard against the making of unlawful payments, please contact David Dees or Nick Crook.

Filed: 16/04/2009 14:56:46