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LOSS OF EARNINGS FOR COMPANY DIRECTOR/SHAREHOLDERS AND BUSINESS PARTNERS IN INJURY CLAIMS
By Simon McIlwaine MA FRSM ACIArb
As a personal injury specialist, I am frequently asked by director/shareholders of private companies to pursue a loss of earnings claim. Likewise, I am often asked if partnerships can sue if one partner is injured and they have had to keep paying out his or her drawings, or indeed the partnership business has been damaged by the loss of a key earner.
If a company director is paid a salary which is unaffected despite a fall in profits due to the fact s/he cannot work, then there is no recoverable loss on the part of the company, and he or she is no different from any other employee.
Likewise, the loss suffered by an uninjured partner because the business income has reduced cannot normally be recovered from a wrongdoer. This is because the other partners and the limited company were not injured and cannot sue for pure business or indirect losses suffered by them.
Many partnership agreements stipulate that a non-working partner ceases to be entitled to share in the profits after a certain period of time (often 3 months) and in that case he or she can recover the loss of profit from the guilty party.
If however a director is also a shareholder and surplus profits are drawn out of the company, the claimant can only recover his or her share of those profits. In a family business, that share may be defined by the director/shareholder's actual input into the business, rather than the formal allocation of shares. So if one spouse does all or most of the work, then he or she may recover all or most of the losses (minus a discount for the other spouse's actual work in the business). The danger however is that a claimant who pursues a claim on the basis that the allocation of profits in the tax returns is purely a tax avoidance measure will open him or herself up to problems with the Inland Revenue and consequent tax penalties, and this must always be borne in mind, especially if the loss to the business is not huge.
Where a company has had to hire other staff or pay existing staff higher wages for working more hours to cover for the absent director-shareholder, then that will be reflected in reduced profits equivalent to the extra payments, so an accountant needs to work out the company's loss of profits and the claimant's % share of that deficit.
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