“We just hadn’t understood the rules.”
We were good at the business. Winning clients, building strategy, generating real momentum — that part we knew. What we didn’t know was that the money coming in wasn’t actually ours to take. By the time the accountants told us what we’d done, the investor’s £50,000 was gone, HMRC was owed corporation tax we hadn’t set aside, and the dividends we’d been drawing all year were illegal. We hadn’t set out to do anything wrong. We just hadn’t understood the rules.
I’d spent years in senior marketing roles before Sam and I took the leap. My father believed in us enough to put in £50,000 — not a small act of faith, and one we felt the weight of. The business launched well. We were experienced, well-connected, and work came through the door early. The momentum felt real.
On our accountant’s advice, we each drew a modest salary of £750 a month and topped it up with monthly dividends of around £5,000 each. It seemed straightforward — the business was trading, money was coming in, and this was the tax-efficient way to pay ourselves. Neither of us had run a limited company before. We didn’t think we needed to look too hard at the numbers behind the structure.
When the first year end arrived, the picture that emerged was alarming. The £50,000 had been absorbed into running the business with nothing set aside for corporation tax. More seriously, the dividends we’d been drawing throughout the year turned out to exceed the company’s profit. They weren’t legitimate dividends at all. We hadn’t known that was possible. We hadn’t known to check.
We were great at generating marketing concepts and strategies. The financial and legal requirements of running a limited company were another world entirely — and we’d been operating in it without realising how much we didn’t know. When our accountants at Lawrence Grant told us how serious the position was, we knew we needed help that was beyond their remit.
The Outcome in brief
Priti Shah · Referred by Lawrence Grant LLP
What Charlie and Sam feared most was not the debt itself — it was the investigation. The thought of a liquidator working through the year’s transactions, identifying the dividend payments, and pursuing them personally was what was keeping them awake. That investigation never happened. The company was closed cleanly, the liability to HMRC was extinguished, and — because neither director faced a recovery action — they were able to repay the investor in full from their own means. The outcome they had feared did not come to pass. The one they had hoped for did.
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The work behind the outcome
Had Charlie and Sam gone directly to an insolvency practitioner, the lens applied would almost certainly have been an insolvency lens — and the tool reached for would have been liquidation — a more costly route, fraught with stress. We do not think that way. Our starting point is always the full range of options available, assessed against what produces the best outcome for the director. Liquidation was not the only route. It was not even the right route.
Lawrence Grant LLP referred Charlie and Sam to us once it became clear that what they were facing was not a bookkeeping problem. A company with no reserves, an unpaid tax liability, and dividend payments that had exceeded profit was in serious difficulty.
Understanding the position fully required competence across two disciplines simultaneously. The dividend payments needed to be assessed not just as an accounting irregularity but through the lens of what an insolvency practitioner would do with that information if appointed. Under the Companies Act 2006, dividends can only lawfully be paid from distributable profits. Where they exceed profit, a liquidator is statutorily required to investigate and pursue the directors personally for repayment. That duty is not discretionary.
The company had no funds to meet the cost of a liquidation. And had liquidation proceeded, the irony was stark: any repayment extracted from Charlie and Sam would in practice have been consumed by the liquidator’s fees. Charlie’s father — the primary creditor, the person who had believed in the venture enough to invest £50,000 — would in all likelihood have received very little, if anything. The most expensive route was also the one that would have helped him least.
Dissolution was cheaper, cleaner, and — critically — available. The company had ceased trading, faced no pending legal action, and had not been threatened with a winding-up petition. We undertook the correct process, ensuring creditors were notified and given their legal option prior to filing the application to strike off. The company was successfully struck off the register and closed.
Because there was no liquidator, there was no investigation and no recovery action against either director. The unlawful dividend question was never triggered. The outstanding corporation tax liability was extinguished on dissolution.
With no recovery action against them, Charlie and Sam repaid Charlie’s father directly and personally — not because they were required to, but because it was the right thing to do. The route we identified is what made that repayment possible. A liquidation would have consumed the very funds that went back to him.
The company was dissolved — not liquidated. HMRC’s corporation tax debt was written off. No insolvency practitioner was appointed, no investigation was conducted, and neither Charlie nor Sam was required to repay the unlawful dividends to the company. Because the directors were not pursued, they were able to repay Charlie’s father in full from their own means. The company was closed with the minimum of consequence for both directors — and the investor did not lose his money.