Shareholder Current Accounts & Liquidation: What Directors Need to Know
Shareholder current accounts are common in privately owned companies. They record the movement of money between shareholders and the company, including funds introduced by shareholders, drawings taken from the business, salaries, dividends and other transactions.
While a shareholder current account may seem like a routine accounting entry, it can become a significant issue if a company experiences financial difficulty or enters liquidation.
Understanding how these accounts operate and how they are treated in insolvency can help directors and shareholders avoid unexpected issues.
What Is a Shareholder Current Account?
A shareholder current account records the net balance of funds introduced to and withdrawn from a company by its shareholders.
When a company is established, shareholders often introduce working capital. These funds are recorded separately from share capital and form part of the shareholder current account.
The balance of the account can change over time:
- A credit balance may represent money the shareholder has advanced to the company.
- A debit balance may represent money the shareholder owes back to the company.
The account appears on the company’s balance sheet and can change depending on the company’s transactions.
How Does a Shareholder Current Account Become Overdrawn?
An overdrawn shareholder current account occurs when a shareholder has withdrawn more money from the company than they have contributed.
Common examples include:
- Personal expenses paid by the company.
- Drawings taken from the business.
- Funds withdrawn without being treated as salary or dividends.
An overdrawn shareholder current account is generally an asset of the company because the company has the right to recover that amount from the shareholder.
Why Managing Shareholder Current Accounts Is Important
Directors and shareholders should regularly review their current account position.
Where shareholders have personally advanced funds to a company, appropriate documentation and security arrangements should be considered. In some circumstances, registering security interests on the PPSR may help protect those advances.
Similarly, shareholders taking drawings need to ensure their current account is managed appropriately.
It is generally preferable for shareholder-employees to receive properly documented wages or salaries, with the appropriate tax treatment applied.
What Happens to Shareholder Current Accounts in Liquidation?
When a company enters liquidation, the liquidator’s role is to identify, protect and realise company assets for the benefit of creditors.
An overdrawn shareholder current account may be considered an asset of the company. If money is owed by shareholders, the liquidator may seek repayment of that amount.
Depending on the circumstances, this may involve:
- Agreeing a repayment arrangement.
- Negotiating a settlement.
- Taking further recovery action where appropriate.
Each situation depends on the facts, financial position and surrounding circumstances.
Can a Shareholder Salary Fix an Overdrawn Current Account?
In some circumstances, shareholder salaries can reduce an overdrawn current account balance.
However, there are important requirements around:
- Whether the company is solvent.
- Whether the salary is properly authorised.
- Whether appropriate records and documentation exist.
- Whether the amount is commercially reasonable.
If a company is insolvent, declaring a shareholder salary simply to reduce a current account balance may create additional issues.
What Will a Liquidator Review?
When investigating a company, a liquidator may examine shareholder current accounts and related transactions, including:
- Transactions that reduced shareholder balances shortly before liquidation.
- Transactions at unreasonable values.
- Entries that may have disguised insolvent trading.
- Significant withdrawals after the last financial statements were prepared.
- Unapproved salaries, loans or transactions.
Transactions involving directors and shareholders require careful consideration because they may be subject to review under insolvency legislation.
Directors Should Seek Advice Early
Shareholder current accounts are one example of why early advice is important when a company experiences financial pressure.
Understanding the company’s financial position, director obligations and available options allows better decisions to be made before circumstances become critical.
At Pryde Accounting & Advisory Limited, we provide practical accounting, business advisory and insolvency advice to help directors understand their position and navigate challenging situations.
About the Author
Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.
Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited