What is a current account?
A current account records the transactions between a company and its director or shareholder. An overdrawn current account occurs when a director or shareholder withdraws more money than they have put into the company. If a company becomes insolvent, the liquidator may treat the drawings as a loan to the director/shareholder. The legal onus to prove that a director or shareholder owes money to the company and in the amounts claimed is on the balance of probabilities.[1]
In the absence of evidence to the contrary, drawings in a director or shareholder’s current account are a debt owed by the directors or shareholders to the company which are payable on demand. In cases where the director has been unable to produce financials, the liquidator may reconstruct the shareholder/director current account using source records (using, for example, bank statements), and the onus is on the liquidator to show that this has been done so correctly.[2]
Director’s remuneration
A director’s remuneration may be authorised by board resolution under s161 of the Companies Act 1993 (the Act), which provides:
- That the board must authorise the remuneration, or the provision of benefits to a director;
- Such authorisation can only occur when the board is satisfied that to do so is fair to the company;
- The board must forthwith enter the authorisation into the register, and directors who vote in favour of authorisation must sign a certificate stating that in their opinion, the making of the payment, or the provision of the benefit is fair to the company, and the grounds for that opinion.
When the above requirements are not satisfied, the remuneration paid to a director is treated as a loan, which the director is personally liable to repay to the company.
Case Study: Madsen-Ries and Vance v Petera
Madsen-Ries and Vance v Petera illustrates some common defences raised by directors regarding overdrawn current accounts, and how these defences are dealt with by the Court.[3]
Mr and Mrs Petera were the sole shareholders and directors of a cartage contracting company. The company went into liquidation due to owing various debts to the Commissioner of Inland Revenue, and its liquidators sought recovery of drawings from the company’s bank account by Mr and Mrs Petera.
Mrs Petera claimed that most of the miscellaneous personal expenses identified by the liquidators were expenditures made on the company’s behalf for business-related purposes, such as payments to takeaway outlets being meals for the company’s drivers. However, no receipts or bank statements classifying these expenses as business-related could be provided. Lang J accepted that a select few of the transactions were business expenditures, as they appeared inconsistent with personal use and were made at a time of the day where the company might be expected to make business expenditures.[4] The rest of the transactions could not be established as business expenditures without documentation.
Mr and Mrs Petera also claimed that most of their withdrawals were salary payments. However, an analysis of the payments showed that they do not “have the character of wages”.[5] Moreover, s 161 of the Act had not been satisfied. Therefore, Mr and Mrs Petera were held personally liable for these drawings.
Mrs Petera was found liable repay $85,600, being the funds paid to her bank account. Mr and Mrs Petera were jointly liable to repay $54,534.70, being the funds spent on personal items – whether it was taken from teller transactions, cheques, ATM withdrawals, transferred to their joint bank account, or transferred to their mortgagee.
[1] Another Orange Service Centre Ltd (in liq) v Vincent [2021] NZHC 2135 at [34].
[2] Kiwibilt Engineering Ltd (in liq) v Pavlovich [2004] DCR 193 at [13]; see also Another Orange Service Centre Ltd (in liq) v Vincent, above n 1.
[3] Madsen-Ries and Vance v Petera [2015] NZHC 538.
[4] At [23].
[5] At [35].
