“Elucidate the different provisions regarding Directors profit out of his office/position”
Introduction
Running a limited company and holding the office of director is a serious responsibility. To do this serious job the directors need some rewards. As reward directors has scope to withdraw a portion of profit from the company. There are three main ways in which money can be drawn from a limited company – repayment of a director’s loan, salary and dividends – but there are key issues to understand regarding each of these. It is important to organize the balance of these three items (when they are all available) in order to minimize your tax liability. However, the basic fact will remain – the more profit the company makes, the more tax you are likely to pay. There is no magic scheme for removing all tax liability! Let’s consider each in turn.
Different ways to draw profit from company by directors:
Dividends
These are a distribution of profits, so it goes without saying that the company must be making a profit before dividends can be paid. If there is no profit then repayment of director’s loan and salary are the only routes. The directors decide on the distribution of profits in dividends and must be voted on and minutes drawn up before the year end. Remember that there should be a board resolution with the date of distribution recorded. Dividends are taxed but, at present at least, are not subject to NI, so saving both employers and employees NI payments.
Repayment of director’s loan
If you have put your own money into the company, then this is recorded in the director’s loan account which totals the money the company owes you. You can draw from this at any time without any tax liability, but you will need to make sure that the cash flow of the business can support this. While it sits in the company you are entitled to charge the company interest. The interest rate is determined by the Board of Directors and should be at a reasonable commercial rate.
The interest you receive must also be declared on your personal tax return as it will be subject to tax. However, if the director’s loan account becomes a loan from the company to you, then you need to be careful as you should not owe the company more than £5,000. If you exceed this you must notify HMRC of the loan and pay 25% of the loan account balance. This tax is however refunded as soon as the loan balance is reduced.
Salary
Remember that the company is a separate legal individual to you. So it can pay you a salary and, just as would happen in any job, tax and national insurance (NI) must be deducted before you receive your pay. The company also pays 12.8% of the salary in NI contributions and is responsible for paying this and the employee’s tax and NI deductions to the Revenue. So, there are significant additional costs in the company paying you a salary.
However, as everyone receives an annual tax personal allowance and there is a further amount of approximately £2,000 that is only taxed at 10%, you can take a salary of, say, £6,500 (up to which point no NI is due) and only pay tax of around £200. You should at least take the annual allowance in salary and preferably the 10% rate band also.
provisions to draw profit from company by directors of PLC according to Company Act 1994(Bangladesh):
Resolutions to be proposed at shareholders’ meetings are classed as either ordinary (requiring a bare majority in number of shares held by persons who attend and vote at the meeting), or special or extraordinary (both requiring a 75 per cent. majority in number of shares held by persons who Attend and vote at the meeting.)
Bangladesh Companies Act, 1994 requires at least 14 days’ notice to be given to shareholders to call an Annual (or Ordinary) General Meeting (or 21 days if special or extraordinary resolutions are to be proposed at such meeting) and 21 days’ notice for an Extraordinary General Meeting.
An Annual General Meeting of the company must be held once per calendar year and no more than fifteen months after the previous Annual General Meeting. Shareholders should be sent the audited accounts of the company together with directors’ and auditors’ reports thereon, proposed to be laid before such Annual General Meeting together with the notice convening such meeting. Further, the Annual General Meeting of a listed company for a year is required to be held within six months of the company’s year end.
At any general meeting:
- on a show of hands, every member who is present in person shall have one vote; and
- on a poll, every member who is present in person or by proxy has one vote for every share of which he is the holder.
The quorum for a Shareholders’ meeting is five persons entitled to vote and present in person. A proxy representing a Shareholder which is a company may not vote unless his appointment as proxy has been approved by a resolution of the directors of the appointing company, which resolution remains in full force and effect at the time of the meeting.
Financial Disclosures
Under the Bangladesh Securities and Exchange Rules, 1987, Bangladeshi listed companies are obliged to prepare annual audited accounts, audited by a chartered accountant, and to send such accounts to the Bangladesh SEC, the relevant stock exchanges and all shareholders of such company at least fourteen days prior to holding of its AGM.
These financial statements, in addition to the requirements of the Securities and Exchange Rules, 1987 and the Bangladesh Companies Act 1994, are required to comply with the International Accounting Standards as adopted by the Institute of the Chartered Accountants of Bangladesh. In auditing these financial statements, the auditors are also required to conduct their audit in conformity with the International Standards of Auditing as adopted by the Institute of the Chartered Accountants of Bangladesh.
Further, the Bangladesh Securities and Exchange Rules, 1987 require Bangladeshi listed companies to prepare half-yearly accounts, which do not have to be audited, but do have to be sent to the Bangladesh SEC, the relevant stock exchanges and all shareholders of such company. The half-yearly accounts must contain a balance sheet, profit and loss account and cash-flow statements prepared in the same way as the annual audited accounts are prepared, and must be sent within one month of the half-yearend.
Also, a listed company is subject to continuing disclosure requirements pursuant to the Listing Regulations of the DSE and the CSE. Accordingly, a listed company is required to inform the Bangladesh SEC, the DSE and the CSE immediately of any ”price sensitive information” (as defined above).
In addition, a listed company must notify the Bangladesh SEC, the DSE and the CSE of the following:
any change in its board of directors; and any change in the holding of each director, officer and/or other shareholder of the company who is or has been the legal owner of ten per cent. or above of any class of the company’s listed securities at any point of time within seven days of such change; and Every transfer of share by the company’s sponsors (including every director, promoter and officer) within seven day so such transfer. Protection of Minority Interests
Minority shareholders who feel that the Company’s affairs are being conducted in a manner prejudicial to their interests may apply to court for relief in a procedure analogous to that contained in the UK Companies Act 1985.
Enquiries into the Company’s Affairs
The holders of not less than 5 per cent. of the issued share capital of a Bangladeshi listed company can petition to the Bangladesh SEC to make enquirers into the affairs of the company in which they hold shares, or its business and transactions, under the Bangladesh Securities and Exchange Ordinance 1969. If the Bangladesh SEC decides to investigate, it has the power to require the production of information from the company and its directors, officers and employees.
Dividends
Under the Bangladesh Securities and Exchange Ordinance,1969 and the rules of the DSE and the CSE, when a final or interim dividend is approved by the directors of a Bangladeshi listed company, the DSE, the CSE and the Bangladesh SEC require that decision to be notified to them within 30 (thirty) minutes. The decision (as notified) will be subject to shareholders’ approval in the Annual General Meeting if the dividend is a final dividend. The dividends must be disbursed to the shareholders with 60 days of such declaration. Director of PLC are paid through this dividend.
Loans to Directors
The Company is not permitted to make any loans to directors or any person connected with a director, unless the loan is for less than 50 per cent. Of the value of the shares in the Company held by the director; is approved by the Company in a general meeting; is approved by the directors; and is specifically referred to in the annual report and accounts of the Company.
Remuneration
According to company act 1994, directors of public limited company can get remuneration if and only if the remuneration is accepted in Annual General Meeting (AGM). In AGM the shareholder of the company will decide about the directors remuneration by voting policy.
provisions to draw profit from company by directors of PLC according to Company Act of United Kingdom:
A director is entitled to be paid only if s/he has a contractual right to payment. The contract could be in any form.
An obvious example would be a written service agreement between the director and the company which expressly provides for payment of a wage or salary, perhaps with other benefits. Subject to the company’s articles, the board has power (as part of its general powers of management) to award service contracts to directors and others. Like all directors’ powers, granting a service contract must be done bona fide for the benefit of the company.
Subject to the company’s articles, the board has power (as part of its general powers of management) to award service contracts to directors and others. Note, however, that CA 2006, sec188 requires any fixed term contract for a duration longer than 2 years (which cannot be terminated by notice) to be approved by an ordinary resolution in general meeting. Like all directors’ powers, granting a service contract must be done bona fide for the benefit of the company.
A contract giving rise to a right to payment could be created in other ways, e.g. under a shareholders’ agreement to which the company and the director are parties, or orally, between the incoming director and the board or its representatives, or if the company has special provisions in its articles to that effect.
Both the <href=”#Model”>Model Articles (for companies registered after 1.10.2009) and <href=”#Table”>Table A (for companies registered before 1.10.2009) contain provisions regarding the remuneration of directors:
M<href=”#Model”>odel Articles provisions are:
19. (1) Directors may undertake any services for the company that the directors decide.
(2)Directors are entitled to such remuneration as the directors determine-
(a) for their services to the company as directors, and
(b) for any other service which they undertake for the company.
(3) Subject to the articles, a director’s remuneration may-
(a) take any form, and
(b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director.
(4) Unless the directors decide otherwise, directors’ remuneration accrues from day to day.
(5) Unless the directors decide otherwise, directors are not accountable to the company for any remuneration which they receive as directors or other officers or employees of the company’s subsidiaries or of any other body corporate in which the company is interested.
Table A provisions are:
Remuneration of directors
The directors shall be entitled to such remuneration as the company may by ordinary resolution determine and, unless the resolution provides otherwise, the remuneration shall be deemed to accrue from day to day.
Directors’ expenses
The directors may be paid all travelling, hotel and other expenses properly incurred by them in connection with their attendance at meetings of directors or committees of directors or general meetings or separate meetings of the holders of any class of shares or of debentures of the company or otherwise in connection with the discharge of their duties.
Directors’ appointments and interests
Subject to the provisions of the Act, the directors may appoint one or more of their number to the office of managing director or to any other executive office under the company and may enter into an agreement or arrangement with any director for his employment by the company or for the provision by him of any services outside the scope of the ordinary duties of a director. Any such appointment, agreement or arrangement may be made upon such terms as the directors determine and they may remunerate any such director for his services as they think fit. Any appointment of a director to an executive office shall terminate if he ceases to be a director but without prejudice to any claim to damages for breach of the contract of service between the director and the company. A managing director and a director holding any other executive office shall not be subject to retirement by rotation.
Directors’ gratuities and pensions
The directors may provide benefits, whether by the payment of gratuities or pensions or by insurance or otherwise, for any director whom has held but no longer holds any executive office or employment with the company or with anybody corporate which is or has been a subsidiary of the company or a predecessor in business of the company or of any such subsidiary, and for any member of his family (including a spouse and a former spouse) or any person who is or was dependent on him, and may (as well before as after he ceases to hold such office or employment) contribute to any fund and pay premiums for the purchase or provision of any such benefit.
Dividends
Paying a dividend is the usual way for a company to distribute a share of its profits among the shareholders. There are detailed statutory rules as to distributions in CA 2006, sec829 to sec853. A detailed consideration of these is presently beyond the scope of this database, but the main purpose behind these provisions is to prohibit companies from making distributions (including dividends) except out of profits.
In a public company, the usual practice is for the directors to declare and pay an interim dividend based on the accounts for the first six months of the company’s financial year. The directors will then recommend a final dividend to the Annual General Meeting based on the profits made in the full year, and the AGM then passes a resolution declaring that dividend. This complies with the Table A provisions (set out below).
In private companies the practice varies widely. If the company is making profits there are essentially two ways in which those profits can be paid over to the people who own and run the company. One is for the directors (or others, e.g. family members) to be paid salaries or fees for the work they have done for the company. Such salaries or fees will be employment income for the recipient and must usually be taxed under the PAYE system, with the company deducting tax at source. Both the company and the director will also be liable to make National Insurance contributions. The other way of taking money out of the company is for the company to pay dividends. These are paid to shareholders (rather than directors) and (unless the company has special articles) will be paid in accordance with the rights of the respective shareholders. Dividends are taxable as investment income in the shareholder hands. The tax rates for dividends are generally lower than for other sources of income.
Provisions in articles on dividends
Ø <href=”#Model”>Model Articles
Procedure for declaring dividends
30.-(1) The Company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends.
(2) A dividend must not be declared unless the directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the directors.
(3) No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights.
(4) Unless the shareholders’ resolution to declare or directors’ decision to pay a dividend, or the terms on which shares are issued, specify otherwise, it must be paid by reference to each shareholder’s holding of shares on the date of the resolution or decision to declare or pay it.
(5) If the company’s share capital is divided into different classes, no interim dividend may be paid on shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrear.
(6) The directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment.
(7) If the directors act in good faith, they do not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on shares with deferred or non-preferred rights.
Ø <href=”#Table”>Table A
Table A provisions on dividends (which many companies registered before 1.10.2009 will have in their articles)
102. Subject to the provisions of the Act, the company may by ordinary resolution declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the directors.
103. Subject to the provisions of the Act, the directors may pay interim dividends if it appears to them that they are justified by the profits of the company available for distribution. If the share capital is divided into different classes, the directors may pay interim dividends on shares which confer deferred or non-preferred rights with regard to dividend as well as on shares which confer preferential rights with regard to dividend, but no interim dividend shall be paid on shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrears. The directors may also pay at intervals settled by them any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment. Provided the directors act in good faith they shall not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on any shares having deferred or non-preferred rights.
104. Except as otherwise provided to the rights attached to shares, all dividends shall be declared and paid according to the amounts paid up on the shares on which the dividend is paid. All dividends shall be apportioned and paid proportionately to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid; but, if any share is issued on terms providing that it shall rank for dividends as from a particular date, that share shall rank for dividend accordingly.
105. A general meeting declaring a dividend may, upon the recommendation of the directors, direct that it shall be satisfied wholly or partly by the distribution of assets and, where any difficulty arises in regard to the distribution, the directors may settle the same and in particular may issue fractional certificates and fix the value for distribution of any assets and may determine that cash shall be paid to any member upon the footing of the value so fixed in order to adjust the rights of members and may vest any assets in trustees.
106. Any dividend or other moneys payable in respect of a share may be paid by cheque sent by post to the registered address of the person entitled, if two or more persons are the holders of the share or are jointly entitled to it by reason of the death or bankruptcy of the holder, to the registered address of that one of those persons who is first named in the register of members or to such person and to such address as the person or persons entitled may in writing direct and payment of the cheque shall be a good discharge to the company. Any joint holder or other person jointly entitled to a share as aforesaid may give receipts for any dividend or other moneys payable in respect of the share.
107. No dividend or other moneys payable in respect of a share shall bear interest against the company unless otherwise provided by the rights attached to the share.
108. Any dividend which has remained unclaimed for twelve years from the date when it became due for payment shall, if the directors so resolve, be forfeited and cease to remain owing by the company.
Conclusion:
The Directors of Public Limited Company can draw their profit in only three ways. Among them the dividend policy is popular. But all these ways need company shareholder approval during the AGM. On the other hand private limited company’s director can draw the profit any time any amount he wants.
References:
1. P Blumberg, ‘Reflections on Proposals for Corporate Reform Through Change in the Composition of the Board of Directors: “Special Interest” or “Public” Directors’ (1973) 53 Boston University Law Review 547
2. KJ Hopt, ‘The German Two-Tier Board: Experience, Theories, Reforms‘ in KJ Hopt and others. (eds), Comparative Corporate Governance: The State of the Art and Emerging Research (Clarendon 1998
3. KJ Hopt and PC Leyens, ‘Board Models in Europe – Recent Developments of Internal Corporate Governance Structures in Germany, the United Kingdom, France, and Italy’ (2004) EGCI Working Paper
4. http://www.beximco-pharma.com/share-information/rights-of-shareholders.html
5. http://www.companylawclub.co.uk/topics/are_directors_entitled_to_be_paid.shtml
6. <href=”#Table”>http://www.companylawclub.co.uk/topics/dividends.shtml#Table.