Director Remuneration

Directors of companies are entitled to receive compensation such as salaries, wages, bonuses, fringe benefits, and loans from their company. Directors must follow strict legal processes to ensure fairness when authorizing such payments, due to potential conflicts of interest. However, many small and medium-sized companies bypass these processes, leading to possible liabilities.

When directors take "drawings" (funds for personal use), it is treated as a running loan account with the company. If the drawings exceed funds introduced by the director, it can be considered a loan repayable on demand. This loan is also subject to fringe benefit tax if it is interest-free. If a salary is not declared to offset the drawings, directors may face demands for repayment from liquidators, shareholders, or the Inland Revenue Department if the company faces insolvency.

Section 161 of the Companies Act 1993 outlines the process for authorising director remuneration. This includes the requirement for board approval, entry in the company’s interests register, and certification that the payment is fair to the company. Failure to follow these steps can result in the director being personally liable for the payment. In cases of non-compliance, liquidators can demand repayment of the funds, as demonstrated by various legal proceedings against directors.

Many directors believe they have the authority to decide how they receive salary or other monetary benefits from their company, given their role in managing the business. However, with increasing awareness among creditors, insolvency practitioners, business partners, and the Inland Revenue Department about this practice, more directors are facing serious consequences for not adhering to the proper procedures for authorizing payments.
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Business advisors, accountants, and lawyers collaborating with directors of small to medium-sized companies is essential to ensure they understand and follow the correct processes for authorizing director payments, in order to avoid legal and financial risks.