August 04, 2010
The number of company directors taking illegal dividends or loans from their businesses prior to insolvency is rising at an alarming rate, city accountants have revealed.
According to one leading firm, eight out of its last 10 insolvency cases have led to investigations over directors illegally obtaining dividends and loans from their companies before they capsized.
Experts believe the temptation for directors and owners to pay themselves an abnormally large dividend has been triggered by the recession’s assault on lavish lifestyles. In addition, the increase in the highest rate income tax band to 50% on April 6th 2010 may also have prompted a spate of illegal activities.
In response, HM Revenue amp; Customs (HMRC), one of the largest unsecured creditors to insolvent UK businesses, has raised the alarm and is asking insolvency practitioners to keep a record of any illegal payments uncovered in the future.
According to Insolvency Service data, 2,169 directors of insolvent companies faced disqualification proceedings in the year to March 31st 2010, up 17% from 1,852 the year before.
"A couple of holiday homes, a taste for sports cars and an expensive divorce settlement will normally come with a big debt that needs servicing every month. For some owner-managers it seems easier to break the rules and take an illegal loan from the company than to curb their spending," said Keith Stevens, Partner at accountants Wilkins Kennedy.
"HMRC wants these directors banned and they want to pursue these directors through the courts for all the money that they can. That is an obligation that HMRC have, so directors need to beware of that,” he continued.
"Directors need to be careful not to treat their business as a personal piggybank."
