Liabilities greater than assets

[Julian7]

My company (just me) has not had much income this financial year, and may end the year with liabilities greater than assets. There's a small credit card balance to be paid off (<£1,000).

I expect to be getting income again early in the next financial year so do not have a problem with this. I could easily pay enough money into the company to pay off the credit card.

Question. If I as a director make a loan to the company, I have effectively replaced a liability to the credit card company with a liability to me. Is this going to cause any problems when I make my annual return? Equity is currently only £1 so I don't really want to increase it to, say, £1,000. That sounds complicated.

What's my best approach?

Thanks,

Julian

[Lance]

It is illegal (criminal) to trade when insolvent. If you are insolvent then you must either wind the company up, or inject some cash.
You can loan money to the company, or inject capital by issuing shares and paying for them.

[NotAllThere]

The purpose of the director's loan account is to for you to lend to your company. Do that.

[WordIsBond]

It is illegal (criminal) to trade when insolvent.

Not strictly true. 'Criminal' is a heavy word to throw around and you should get it right when you do.

If you are insolvent then you must either wind the company up, or inject some cash.

Again, not true. His company may be technically insolvent if liabilities exceed assets but there is nothing wrong with him just going and getting another contract to pay off any liabilities.

His company could also own five computers, a mobile phone, a printer, 72 printer cartridges, and 546 reams of paper, and so have assets that exceeded his liabilities, but he could still be in trouble for continuing to trade if it harmed creditors. The acid test is really whether your continued trading will protect the interests of creditors.

You can loan money to the company, or inject capital by issuing shares and paying for them.

If you have to shut down when insolvent, and having liabilities greater than assets is insolvency, then OP loaning money to the company will solve nothing. That is just shifting liabilities, but they will still be greater than the assets. He would still be trading insolvent -- but he would be the only creditor so no one would be harmed by him doing so.

OP, use the director's loan. You do have a responsibility, as a director, to ensure that you are protecting the interests of creditors. Providing a director's loan to the company does that. If you are the only creditor you don't have to worry about any other ramifications and you can just carry on with whatever makes sense. Be aware, though, that there may be another liability out there that you aren't thinking of right now -- if you had income in the past year you may also have a Corporation Tax liability. Good luck with that new contract. In future, you'd probably do better to keep more in reserve in the company for this kind of situation.

[Maslins]

What WordIsBond said.

It's not illegal to have an insolvent company. It is illegal to take dividends from an insolvent company, or take dividends that push a company into insolvency. Where a company is insolvent, the directors do need to be careful that where they do continue trading, they can demonstrate it is likely to be profitable, hence continuing will make the situation better for creditors, not worse.

As WIB said, loaning your company money won't make it solvent, it's just swapping the company's liability to a credit card company to be a liability to you. Theoretically you could issue new shares to make it solvent, but in the circumstances this is most likely more trouble than it's worth.

In practice, lend the company some money so it can pay its debts to independent third parties, and try to secure profitable new work...but do not take any dividends for a while.

[Craig@Clarity]

Don't worry too much in this particular circumstance. In reality you're fine to be insolvent with you loaning the company money by replacing the company credit card with a loan to yourself (from the company's perspective). It's always better that the company owes you money than the other way around. In this scenario, the company will hopefully start becoming solvent again when it generates sales again. At the moment, you're simply propping up the expenditure of the business whilst there is minimal turnover. Don't be too concerned about being labelled a "criminal" and having to wind up your company. It's more of a concern if you have paid dividends whilst insolvent as HMRC will likely pick up on this and reclassify them as loans which shouldn't be a problem as the company would owe you money back anyway so why wouldn't you deem them to be loan repayments tax free before dividends anyways.

As far as filing company accounts go, continue as you are. If, at the end of the financial year the company is insolvent, so be it. File them as they are. You'll presumably file a corporation tax return to HMRC with a loss which you can either carry back or forward. No need to start issuing additional shares etc.

[northernladuk]

He'll need to add another £15 for his companies house filing won't he?

[Craig@Clarity]

He'll need to add another £15 for his companies house filing won't he?

In old money yes. It's £13 now. What are you going to do with the extra £2 you've just found out you've now got hanging around?

[Scruff]

What the Accountants have said above.

Bear in mind the Terms & Conditions of the Company Credit Card, since it is not unusual for Banks to have a Clause whereby the Director(s) take personal liability, in the event that the outstanding balance isn't settled by The Company?

Any Company Credit Card that I have ever had, has had the payment terms where the full amount is settled in the following month.

[northernladuk]

In old money yes. It's £13 now. What are you going to do with the extra £2 you've just found out you've now got hanging around?

Stick it in a high interest Aldermore and watch it grow of course.