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Family members who run businesses together should take careful note of a High Court case in which a husband and wife’s commingling of personal and company funds and failure to keep proper records landed them in legal hot water.
The couple’s company had traded for little more than a year before it went into administration and, subsequently, creditors’ voluntary liquidation. Its outstanding liabilities were estimated at more than £2.8 million, much of which was owed to HM Revenue and Customs.
The company’s liquidators launched proceedings against the wife, who had acted as the business’s bookkeeper, on the basis that various sums that had been paid to her at a time when the company was insolvent were either gifts or transactions at an undervalue, within the meaning of Section 238 of the Insolvency Act 1986.
The Court noted that the wife did not have a written employment contract and that various sums had been paid from the company into a joint personal account that she held with her husband without explanation. In the absence of adequate records, there was a considerable risk that such payments might be used to disguise a process of extracting cash from a company at the expense of creditors.
The Court accepted that some of the payments represented remuneration for the wife’s work or reimbursement of motoring or other expenses. However, the lack of a paper trail meant that certain other payments could not be so explained. She was therefore ordered to repay £12,700 to the liquidators.