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If a Director wants to extract money from a limited company personally, they may wish to consider, that they ought to be able to evidence that it was money they were entitled to receive.
One way to seek to understand how directors can take money from a limited company is to consider what can happen when money has to be paid back and the circumstances under which they may wish to take the money.
The case of Baker (Liquidator of TMG Brokers Limited) v Staines & Anor  EWHC 1006 (Ch) (“Baker”) demonstrated what could happen to a director if they are unable to justify their receipt of monies from a limited company. It is a good textbook case for directors to consider, not just because of the matter of money extracted from a limited company but also the importance of company books or records and how the court observes director conduct.
The company concerned went into Liquidation. It was insolvent and the Liquidator pursued the directors in respect of transactions that had been entered into under Section 212 of the Insolvency Act 1986 for breach of duty.
In the case of Baker the application was against two director/shareholders.
A series of payments from the company (or monies paid by a customer) was to the directors and a connected company summarised as follows:
The payments in question were:
i) from the Company’s bank account with Bank Frick & Co in Liechtenstein (the “Frick Account”) to Mr Madu made during the period 12 September 2013 to 1 December 2016, totalling £175,053.32 (the “Frick Payments”);
ii) cash withdrawals from the Frick Account, which the Liquidator considers were most likely made by Mr Madu of €50,409.11 (the “Frick Cash Withdrawals”);
iii) £213,791.94 directed to be paid by one of the Company’s debtors to the account held by a connected company, TMG Pay Limited (“TPL”) with Barclays Bank in England, which company and bank account were also under the control of the Respondents (the “TPL Account”). Of the £213,791.94 paid into the TPL Account which the Applicants seek to recover (the “TPL Payments”) they refer in particular to the following “Identified Payments”:
iv) £132,873 paid to Mr Madu;
v) £13,786 paid to Mr Staines;
vi) £6,552 was out in cash in Italy, where Mr Madu resides; and
vii) £53,747.91 used to discharge TPL’s liabilities.
Key Considerations Of How Directors Can Take Money From A Limited Company
The judge went through the key objectionable ingredients as to what is not permitted:
- A limited company not in liquidation cannot lawfully return capital to its shareholders except by way of a reduction of capital approved by the court.
- A limited company not in liquidation cannot lawfully return capital to its shareholders except by way of a reduction of capital approved by the court
- When a director has to consider the extraction in the context of creditors the test is whether an intelligent and honest man in the position of a director of the company concerned could, in the circumstances, have reasonably believed that the transaction was for the benefit of the company if there is evidence of adequate consideration.
- If a company is of doubtful insolvency then creditors’ interests cannot be overlooked when considering the extraction.
- Ignorance is unlikely to be of assistance to rescue a director who personally receives money whilst insolvent when perhaps they ought not to have done so.
- A director who receives money from a limited company needs to be able to justify their receipt of the same.
- Bad or poor record-keeping may well not rescue a director from having to repay the money they have received.
- If a company is insolvent then a board resolution will not ratify the breach of duty by the director because the interests of creditors can be said to supersede those of the shareholders.
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Disclaimer: How Directors Can Take Money From A Limited Company
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