Risks of overdrawn current accounts

Tuesday 22 September, 2020

Shareholder current accounts are an easy and convenient way to manage and record drawings by shareholders from the company and injections of capital into the company. Some shareholders who work in their company prefer to take drawings though their current account rather than a regular salary. However, in the current economic climate, current accounts can pose a significant risk if they become overdrawn.

A current account becomes overdrawn if shareholders take more out of the company in drawings than they have put in as capital. Current accounts are more likely to become overdrawn when times are tough and the company is struggling financially, but the shareholders continue to take drawings from the company because they have no other source of income. An overdrawn current account is a debt owed by the shareholder to the company and is recorded as an asset in the company’s accounts. If the company goes into liquidation, the liquidator will likely try to recover the overdrawn funds from the shareholders.

In a recent Court of Appeal case, one of the shareholders took drawings from the company to pay a salary to the CEO of the company, until the company became profitable and could afford to pay the CEO’s salary itself. The shares were owned by a trust, and the CEO was one of the trustees. Unfortunately, the company never became profitable and eventually went into liquidation. The liquidator successfully sought repayment from the shareholder trustees of over $500,000. The Court of Appeal accepted that the drawings by the shareholder trust might have been to remunerate the company CEO, but that didn’t affect the trustees’ liability to replay the current account debt. If the company had instead paid a salary directly to the CEO, the trust wouldn’t have been liable to repay the money.

Many businesses are struggling as a result of COVID-19 and its effect on the economy. Now is a good time to look at how you are using current accounts in your company or trust and consider whether they pose a risk to you or your shareholders.

If you have concerns about overdrawn current accounts, or other risks in your business, we can help. Get in touch with one of our experts below.