Company has a cashflow problem. Who would you consider more important to be paid - salaries of directors who own the company or suppliers?
Me, I think suppliers, the directors should take a hit in order that their company can continue trading and for this to happen the suppliers are vital. Also I just think morally, it's the right thing to do. Am I just naive?
I would agree with you that from a business point of view, paying the suppliers is more important. If you don't pay them, they won't supply the stock you need to trade, bad credit ratings etc.
There are other conditions that may have a bearing on who should be paid though, for example, if the directors are on a contract of employment, not paying them may take them below the national minimum wage. (Not sure but I believe a director can opt out of NMW though)
While I agree that my morals would make me pay suppliers before me (I'll never be rich ) It is not uncommon for a Ltd company to juggle things around, delaying payment until they are forced to, or fold. You only have to look at some of the companies that cease trading (mainly furniture and carpet stores for some reason) that take deposits off customer on one day and close the doors the next, leaving Jo Public out of pocket (depending how they paid of course) to me that is not only immoral but borders on the illegal, as someone must now that the company is going to close, and that they will be taking money, with no intention of supplying goods in return.
your quite correct. National Minimum Wage is not applicable to directors.
A director has a fiduciary duty of care for their company very similar to the duty of care that one has for a child. To put themselves before the needs of the company does not tally with that duty of care.
The approach that should be taken is to pay the suppliers and to defer but not cancel their own payment as the company must pay for their services and both debts are quite legitimate.
Morals aside, where the directors would be acting illegally is if they paid themselves via a dividend as the dividendd can only be against profits and by definitiion here there is no profit to distribute.
Where the directors know or ought to have known that they would be unable to pay the suppliers when they ordered the goods then they are actually trading illegally and a court may overturn the protection given by the veil of incorporation.
If this happens then the directors may find themselves in a position where they must reimburse the suppliers personally and they will be banned from holding further directorships for a period of time.
The above is theory and I assume not applicable to this case where I'm assuming that the issues are a genuine cashflow issue. (there was no indication in the question that the directors were going to take the money and run, just that they might take the money and defer payment)
If this is just short term can it be assumed that the company can be salvaged as a going concern and in the long term the company would have the funds to pay both the directors and the suppliers? Maybe the best approach would be to pay everyone some of what was owed rather than only one side everything that they are owed?
Interesting conundrum and will be interested to see how this one pans out.
All the best,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Sadly, I was hoping you might say, oh yeah this is quite normal!
Shaun, I am pretty sure there is no intention at all to take the money and run, but then I would pay my suppliers first, and my directors don't, so what do I know!!!
I am confident it is a genuine cashflow problem, trying to get money out of their customers is impossible sometimes.....it makes me so angry, they don't reply to my emails, it's not their day in the office, oh yes they are in the office but they are not working, they didn't get a copy of that invoice. And some of them have terms whereby they don't pay the company till they get paid and it's all to do with insurance claims and there are invoices over a year old......and I am expected to try and juggle the cash to pay people, and take the **** (nearly swore here) emails when suppliers don't get paid, oh and being the genuine doormat I am I even delay payment to myself (don't worry, I get it in the end, or I have until now).
And now I'm worried because you've mentioned dividends, and yes they do!
I need to not get so personally involved, but I want their company to be a success for them and for me, I want them to have a good reputation and they just don't seem to, I don't know, behave like adults! You may have seen my previous post about directors not trusting each other, that's another story.
Well, that's enough, say too much and I might get into trouble, and anyway, better get back to magicing up some money!
The issue really comes down to owner managed businesses. A director can opt out of national minimum wage but not where there is an employment contract in place.
If they are taking dividends then this could be a big problem. Too many clients are using companies money for their own benefit at the moment.
I went to see one of my clients this week as there was a lot of cash being taken out of the business. There are minimal profits but they had withdrawn in excess of £30k cash. Turns out that without informing me they had taken a large company loan that that was basically funding their lifestyle (family trip to Disneyland etc.) Now the creditors are circling!
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Hendy, I really don't think it's anything like that. I just don't understand that behaviour, surely they must realise if they carry on like that their business will fail and all chances of trips to Disneyland are off! Perhaps is more ignorance than deviousness.
I would like to discuss the dividend issue further.
Shaun, you seem to imply that if there's no cash there's no profit. I could be wrong and am willing to hold my hands up, but say they buy something for 50, sell it for 100, there's 50 profit even if the customer takes ages to pay and causes a cash flow problem, but pays in the end and the debt isn't W/O. In that case would taking dividends be illegal?
on the National Minimum wage and directors question you may remember that another debate turned into a minor debate about it recently. Have a look here :
As you say Phil, it comes down to whether there is an employment contract. Which, is also likely to be one of the differentiating factors between those employed into a position and owner directors.
Makes you want to beat their heads against something solid when you hear stories like the company taking loans to fund the owners extravagance doesn't it.
I think that many owners feel secure in that the link between the company money and theirs are protected by the veil of incorporation. What's the worst that can happen? Company goes belly up then they make a new one.... I think that directors really need to be educated to the truth of such scenario's. If they do anything amiss then the veil can be lifted and they are personally responsible for the companies debts.
Working with a supplier to one company who very much had the attitude of spending the companies money rather than paying suppliers we ended up going to court. the veil was lifted but the ex director (they folded the company assuming that was protection) claimed that they did not have the money to repay the debt... So we had a Freezing order and charging order raised over the guys house. He couldn't sell, couldn't remortgage but we couldn't get an order to sell the property from under him, I think that it was because it was his main resicence and he had not actually defaulted on his mortgage payments?
I'm not talking here about your scenario Maria where it seems to be a genuine cash flow issue. The case I'm thinking of was someone who really had no intention of paying suppliers who he seemed to regard as charitable suppliers of goods (in the case of the company that I was working with, specialist gas supplies). There's a good living to be made out there apparently by selling goods that you don't actually own!
Oh, and the case that I'm thinking of also sold the gas cylinders on for scrap assuming that he owned the cylinders because he had bought the gas! Wonder how shocked he was when cylinders that he had probably got £10 each for were rebilled to him at £600 a pop!
Right, sorry, got completely off subject there. The case that I'm talking about was blatant theft from a supplier. It's not really applicable to this scenario but I got onto it because I was thinking about directors who assume that their personal finances are immune from being touched in the event of a claim.
Happy Friday everyone.
talk in a bit,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
If you do go down the factoring road look seriously at the offerings from the banks. I believe that Lloyds has quite a good service.
Always look at the small print with factoring arrangements (There are several different sorts of factoring arrangement). Often they are really loans against invoices and acrue interest.
If the factoring company (assuming that they take over the debt which will not necessarily be the case) cannot get the money from the debtors then you may find that you need to repay them their advance plus interest (which can be quite high). So the company ends up still with no income but a big interest bill to pay.
As I say, if you do go down this path the high street banks may not offer such a high percentage of invoice value but you may find their services cheaper for your business in the long run.
kind regards,
Shaun.
edited because of my inability to spell even the simplest words!
-- Edited by Shamus on Friday 8th of July 2011 01:29:19 PM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Ahhh, you spotted it at the same time as me! Sorry Bill nothing freudian about the slip I assure you. Just the link between my brain and fingers isn't always what it should be.
On the Avatar front I think Top Cat is quite apt.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi. Factoring was mentioned but the directors said they'd looked into it before and because of the type of business, A LOT of small value transactions, the factorers (sp?) wouldn't be interested. Also, as I mentioned, some of the clients don't pay until they get paid, and, this I didn't mention, the amount they pay depends on the outcome of the insurance claim.
Anyway, off on hol now for a week, thank you all for your helpful, informative and interesting replies.
) It is not uncommon for a Ltd company to juggle things around, delaying payment until they are forced to, or fold. You only have to look at some of the companies that cease trading (mainly furniture and carpet stores for some reason) that take deposits off customer on one day and close the doors the next, leaving Jo Public out of pocket (depending how they paid of course) to me that is not only immoral but borders on the illegal, as someone must now that the company is going to close, and that they will be taking money, with no intention of supplying goods in return.
) holiday
