Overdrawn Director's Loan Account - Director's drawings to meet gambling losses

Presented facts (names changed to preserve confidentiality).

Jill Ponderstone is a chartered accountant. Her client Blankman Ltd is a small company owned by husband and wife Charles and Brenda Newton. They are both directors of the company and each own 50% of the shares.

In practice Charles runs the company and Brenda's only involvement is signing off documents as and when required.

Blankman Ltd are debt collectors. They charge 30% of sums collected. All the debts are collected on behalf of Gollygee PLC with whom they apparently have an ongoing arrangement to collect old debts which Gollygee is no longer chasing.

Charles has in the past 18 months drawn £50,000 from the company bank account without any formalities. Jill is preparing annual accounts for the company which will show the £50,000 as an overdrawn balance on Charles' director's current account.

As a result of this drawing, the company is unable to pay to Gollygee PLC the 70% due to it in respect of certain debts which it has collected from Gollygee's former customers.

Jill has reason to believe that Charles has used to £50,000 to meet gambling losses and suspects that he will be unable to repay the company.

Jill believes that both Brenda and Gollygee PLC are unaware of the fact that Charles has borrowed a substantial sum from Blankman Ltd.

She proposes to provide for tax on the overdrawn director's current account and put a relevant note in the accounts.

Jill asks whether she should report the matter to Gollygee PLC, or to SOCA, or both.

MLRO Support - Opinion:

Jill should first discuss the matter with Charles to confirm her understanding of the position and his ability (or otherwise) to repay the company. If Charles indicates that he is able to repay the money Jill should satisfy herself that this is indeed the case.

Second, she needs to check whether the company's accounting records correctly reflect the sums collected and other transactions. Also she should check any returns or correspondence between Blankman Ltd and Gollygee PLC to ascertain whether Gollygee PLC are being misled or misinformed about monies collected and payments due to them, and to check the legal nature of the arrangement between the companies. Has Blankman Ltd, for example, purchased the debts in return for 70% of the sums which it subsequently collects, or do the debts still belong to Gollygee with Blankman Ltd only entitled to a commission on amounts recovered?

The mere overdrawing of Charles' director's current account is not a criminal offence, as the company is a private company.

However if Charles' actions are dishonest, then the drawing of the money may be theft from Blankman Ltd or from Gollygee, which would be reportable to SOCA.

There is no simple test of 'dishonesty' but in a recent case the Court of Appeal indicated that honesty is an objective standard. "The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. . . . Acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty."

In this case it appears that Charles is acting in reckless disregard of the rights of Gollygee PLC, Brenda and Blankman Ltd.

Third, Jill should call a meeting with both Charles and Brenda (as the directors of Blankman Ltd) to frankly discuss the overdrawn account and its implications. It would be reasonable to advise Charles a few days in advance of the matters to be discussed at the meeting, so that he has an opportunity to disclose the position to Brenda before the meeting itself. If Brenda supports her husband's use of company monies, both directors should be asked to confirm this in writing to Jill by signing a suitably worded letter.

Fourth, unless it can be shown that Charles was not acting in reckless disregard of others' interests (for example, because he can readily repay the borrowing) and that Gollygee PLC have not been misled, in our opinion the borrowing is dishonest and should be reported to Jill's MLRO (and on to SOCA). If false or misleading information has been passed to Gollygee PLC that should also be reported to SOCA as this deception may also be a criminal offence.

However no information should be volunteered to Gollygee PLC by Jill as this would be a breach of client confidentiality.