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A shareholder current account records the net balance of funds introduced to and withdrawn from a company by its shareholders.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An overdrawn shareholder current account occurs when a shareholder has withdrawn more money from the company than they have contributed.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• Funds withdrawn without being treated as salary or dividends.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

Liquidation represents the formal end of a company’s life. While establishing a company is relatively straightforward, bringing a company’s affairs to a close is a highly regulated process requiring careful management and specialist expertise.

A company liquidation involves a number of legal obligations and can have significant implications for directors, shareholders, employees, creditors and other stakeholders.

At Pryde Accounting & Advisory Limited, we understand the complexity of the liquidation process and provide professional guidance to ensure the process is managed appropriately, transparently and in accordance with legislative requirements.

What Happens When a Company Is Liquidated?

Once a liquidator is appointed, the liquidator takes control of the company’s affairs.

The directors remain in office but cease to have control over the company’s operations. The liquidator becomes responsible for managing the liquidation process, including:

• Taking control of company assets.
• Investigating the affairs of the company.
• Reviewing the actions of directors.
• Realising assets at appropriate value.
• Communicating with creditors and stakeholders.
• Distributing available funds in accordance with statutory priorities.
• Reporting any potential offences or misconduct where required.
• Providing ongoing reports throughout the liquidation.

The role of a liquidator is to act independently and ensure the company’s affairs are dealt with fairly and according to the law.

How Does a Company Enter Liquidation?

There are several ways a company can enter liquidation.

Shareholder Appointment

Where shareholders decide the company should cease trading, they may appoint a liquidator through a special resolution.

Court-Ordered Liquidation

A company may also be placed into liquidation by the High Court, commonly following action by a creditor who believes the company is unable to pay its debts.

If a company is experiencing financial difficulty, seeking advice early can provide greater clarity around the available options.

Restrictions on Appointing a Liquidator

Where a company has already been served with an application for liquidation by the Court, restrictions apply regarding the appointment of a liquidator by shareholders or directors.

In certain circumstances, an appointment must occur within prescribed timeframes or it may be invalid unless the creditor who filed the application provides consent.

These provisions exist to protect the independence and integrity of the liquidation process.

What Happens to Creditors in a Liquidation?

Creditors are generally paid according to the priorities established under New Zealand insolvency legislation.

The outcome depends on factors including whether a creditor has security, the assets available and the claims against the company.

Secured Creditors

Secured creditors have security over specific company assets or may hold a General Security Agreement (GSA) over company assets.

Their rights depend on the nature and registration of their security interests.

Liquidator Expenses

The costs and expenses associated with managing the liquidation are generally paid from available company assets before distributions are made to creditors.

This can include costs such as:

• Liquidator fees and expenses.
• Costs associated with preserving assets.
• Necessary expenses incurred during the liquidation process.

Employees

Certain employee claims, including eligible wages and holiday pay, receive preferential treatment up to statutory limits.

Some exclusions apply, including certain claims relating to directors and related parties.

Inland Revenue Department

Certain tax obligations, including PAYE and GST claims, receive priority over unsecured creditors where legislation provides.

Unsecured Creditors

After secured claims, liquidation costs and preferential claims have been addressed, any remaining funds may be distributed among unsecured creditors.

Shareholders

Shareholders are paid last and only receive a distribution if all other claims have been paid in full. In most insolvent liquidations, this does not occur.

Liquidation Reporting Requirements

Liquidators are required to provide reports to creditors and shareholders throughout the liquidation process.

The initial report provides information on the company’s position, including an estimated statement of affairs.

Further reports are generally provided at regular intervals until the liquidation is completed.

The quality and availability of company records can significantly affect the efficiency of this process.

Creditor Compromise – An Alternative to Liquidation

A creditor compromise can provide an alternative pathway for companies experiencing financial difficulty.

A compromise is a formal arrangement between a company and its creditors to restructure outstanding debts. It may allow a business to continue operating while addressing financial obligations.

The process generally involves:

Proposal

A proposal is prepared outlining the terms of the compromise, reasons for the proposal and the expected outcomes for creditors.

Creditor Meeting

Creditors are provided with information about the proposal and have the opportunity to consider and vote on it.

Approval

A compromise requires approval in accordance with the requirements of the Companies Act 1993.

Once approved, the compromise becomes binding on the relevant creditors.

Benefits

A creditor compromise may:

• Allow a viable business to continue trading.
• Provide creditors with a better outcome than immediate liquidation.
• Create a structured pathway to resolve financial difficulties.
• Reduce the need for formal liquidation proceedings.

Understanding Your Options

Every business situation is different. The best solution depends on the company’s financial position, the interests of stakeholders and the available options.

Early professional advice can help directors and stakeholders understand their position, protect value and make informed decisions.

At Pryde Accounting & Advisory Limited, we provide confidential advice and specialist insolvency services to help you navigate difficult situations.

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