Mixing personal and company funds – an unhealthy cocktail
27 September 2016: A recent High Court case, in which a husband and wife’s commingling of personal and company funds and failure to keep proper books and records, should provide food for thought for family run businesses.
The company had traded for little more than a year before it entered administration and then creditors’ voluntary liquidation. The company’s outstanding liabilities were estimated to be in excess of £2.8 million, the majority of which was owed to HM Revenue & Customs. The wife had acted as the company’s bookkeeper and, on the basis that various sums had been paid to her when the company was deemed to be insolvent, the liquidators commenced proceedings. The Court noted that the wife did not have a written contract of employment and that the various sums had been paid to her from the company’s account into a bank account jointly held by her and her husband without explanation. Whilst the Court accepted that some of the payments related to her remuneration and repayment of expenses, the absence of any supporting documentation to explain the other payments meant that the Court found the wife liable to repay £12,700 to the liquidators.
This case highlights the practical importance of directors keeping proper records at all times, notwithstanding the fact that the Companies Act places a statutory duty on directors to maintain and preserve company books and records. Had the payments in the above case been genuine and appropriate records been kept, the wife may not have been found liable to repay the funds. Alternatively, the lack of records could have been a deliberate attempt to conceal the transactions, in which case the correct outcome has been reached. Often, directors believe that a lack of books and records will stifle a liquidator’s claim against them but it is clear that if the directors cannot provide an adequate explanation for the transactions themselves then the interests of creditors will be protected by the Court.