Are Profits Withdrawn from a Ltd Company as Salary/Pension Safe from Legal Action?

missmoleman

Hi Guys,

Hypothetical situation for you I just wanted to get some opinions on...

Suppose I set up an ice cream selling brand called Tom and Jerrys Ltd. The business does well and I withdraw the profits as salary each month paying income tax etc and put some into a pension.

Then at some point, the owners of the Tom & Jerry cartoon decide that my name infringes on their copyright etc and they sue me for millions. My company loses the case (or can't afford to go to court with them) and gets shut down and pays what profits it has left over to Warner Bros.

What I'm wondering is if the money I have previously withdrawn as salary, paid tax on etc is now 100% mine as an individual and safe from legal action or can Warner Bros come after this too claiming it's money that was made via infringing on them? I realise if I were to suddenly withdraw the years profits as salary in the event impending litigation that might be improper, but supposing I'd been extracting profits on a monthly basis all the way along, would that money be 100% safe in the even of legal action?

Any opinions on this would be much appreciated!

Thanks

godtabh

Probably depend on what type of company it was ie sole trader, limited company etc

missmoleman

godtabh wrote: »

Probably depend on what type of company it was ie sole trader, limited company etc

Thanks for the reply.

It's would be a limited company with limited liability.

godtabh

Then I think the action is against the company. best to speak to some one who knows what they are talking about

seb65

Hypothetically, you could gain protection via the corporate shield. Just look up and see how the shield can be broken (or the veil lifted).

In the past, the veil has acted in the interests of, and against, company directors. For example, if, say, your company had very little resources to hire Counsel when the action was brought by Ben and Jerry's and you wanted to represent the company yourself. Guess what? You are joe blow and have nothing to do with the company, as the company is its own entity. Therefore, you cannot act on behalf of the company either (unless you are a qualified legal representative).

I am not sure what the repercussions are when you set up a company that is, in fact, illegal? In this instance, would the courts find it was always illegal?

Shelflife

If the company made €1m and you then paid yourself €1m in salary in order to leave the company pennyless, it could be seen as an attempt to hide the money from the courts and they may come after you.

Revenue are now seemingly coming after directors who have paid themselves handsomely while not paying their vat/tax etc. the arguement is that you cant ru up a debt with them in order to pay yourself.

Marcusm

The UK case of Aveling Barford v Perion might be of application; from memory it deals with transactions between a company and the persons controlling it where transactions were at undervalue or were preferences to deny creditors or potential creditors. Liquidators also can clawback assets where there is an element of fraudulent preference. Where a liability or claim was reasonably foreseeable, the directorswould also have obligations to make appropriate provisions in drawing up "true and fair" accounts which would be relevant in determining the availability of profits to support a divided.

missmoleman

Thanks for the replies guys.

While it's not foolproof, I'm guessing that having withdrawn profits as salary is a safer option than leaving the money in the company if you are worried about potential legal action in the future?

There would be no issue of tax/vat being unpaid or anything of the like, it's just the minor threat of potential legal action means I'd like to have company profits as safe from this as possible if it were to happen.

I think to make the example more realistic to my hypothetical situation, Tom and Jerry's ice cream might be just one flavour we'd sell, ie Warner Bros might have an issue with this small part of the business but I don't think they'd be able to close us down entirely on the basis of this, perhaps just seek damages in relation to profits made out of the Tom and Jerry's ice cream?

Any further advice would be much appreciated!

Sacksian

The popularity of Bailey's Chocolate Chip ice-cream is overstated. Apart from any economic reasons, refuse to serve it on grounds of good taste.

However, you should definitely offer pistacchio and butterscotch flavours (separately).

Lorgach

@ Sacksian. . . . I think that Baily's Ice Cream tastes fantastic

Reloc8

The company would be liable to account for its profits - i.e pay them to the aggrieved party. Of course it might not have any money left to satisfy a judgment and do could simply be wound up.

However, any other person, corporate or natural, who benefited financially if they conspired with the company in the passing off/copyright infringement would be similarily liable. So if the Directors decided the company would deliberately commit torts or copyright infringement they could very easily be nailed for their own gains.

The courts arn't going to stand over profits made by deliberate infringements of the criminal law (Copyright and related Rights Act for instance)