Directors Loan Account
Insolvency brings a whole new set of rules - make sure you know where you stand
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If your Directors Loan Account is overdrawn, do not speak to an insolvency practitioner until you speak with us first
An overdrawn loan account during insolvency makes you personally liable
It’s not unusual for a Director’s Loan Account to be overdrawn. The problem occurs at the point a company becomes insolvent where the Director then becomes personally liable for the overdrawn balance.
This is something an insolvency practitioner will investigate thoroughly
Once appointed, insolvency practitioners are duty bound to recover overdrawn balances on Director’s loan accounts in the interests of creditors. They will undertake a detailed examination of transactions to recover as much as possible.
Find out before entering insolvency how to minimise your personal liability
Do not make the mistake of leaving this until after entering insolvency as it can put your personal assets at risk. Insolvency practitioners can make a commercial decision on how these funds are recovered and will consider offers made in advance of insolvency to pay a reduced amount. We can help with this.
How we assess your Directors Loan Account
First of all, we Establish the status of the account
Our first step is to determine accurately what the balance on the account is and how we do this will depend on the quality and extent of your accounting processes. It’s important to get an accurate figure on this so there are no unwanted problems further down the line.
Ensure all transactions to your credit are accounted for
We will analyse the transactions to the account to ensure that all possible entries that will reduce the balance are included such as salary and bonus allocations through the PAYE scheme, business expenses paid for personally, and any credit items you have made back into the company.
The implications of a credit or debit balance
If there’s a credit balance on the account, the company effectively owes you money, however you cannot repay yourself prior to insolvency and upon insolvency you become a creditor with the rights of other creditors. A debit or overdrawn balance, unfortunately becomes your personal liability.
Negotiating a deal on an overdrawn account prior to insolvency
This is the best approach to take if your loan account is overdrawn; with accurate knowledge of your indebtedness you can negotiate your liability prior to insolvency. Speak with one of our specialist advisors to find out how we can help determine how much you owe and how best to submit a proposal for negotiation.
Be clear on the status of your Director’s Loan Account before entering insolvency
Find out how we can help, our initial consultations are free.
What is an overdrawn Directors Loan Account?
Directors Loan Accounts are great during normal circumstances
A Director’s loan account is a record of the drawings of funds a Director takes from the company, excluding salary and dividends. The account should be reconciled and cleared at the end of each financial year or additional tax will be due.
An overdrawn director’s loan account is created when a Director takes funds from the company which is effectively a loan that has to been repaid at some point in time.
It’s not unusual for company Directors to take money out of the business in various forms other than as a dividend or salary. In these circumstances any money taken out of the business is considered to be a loan from the company to the Director, and just like any other lending facility, it must be repaid at some point.
The Director’s loan account is used to record and document the transactions between the company and the Director, and there are three basic scenarios:
- Where no money is taken from the company (apart from salary and dividends) the Director’s loan account will have a nil balance.
- The Director pays personal funds into the company, for example to pay an expense or purchase assets, and the loan account will show a credit balance meaning the company owes the Director.
- The Director takes money out of the company leaving the loan account with a debit balance and thus the Director owes the balance to the company.
Insolvency changes the situation
Under normal trading conditions having a director’s loan account that’s in debit is not unusual and not necessarily a problem, as long as the balance of the loan is repaid within nine months of the end of the accounting period.
However, when a company becomes insolvent the rules of the game change and the Director’s loan account becomes overdrawn. The Director now becomes personally liable for the amount the loan account is overdrawn by.
The harsh reality of an overdrawn loan account during insolvency
The Director becomes personally liable for the balance on the overdrawn loan account and it is a liquidator’s duty to ensure the loan is repaid. The liquidator will demand repayment for the benefit of creditors.
This is a serious situation which puts a Director’s personal assets at risk.
If the Director can’t or won’t pay, legal action can be taken by the liquidator which can lead to bankruptcy proceedings against the Director.
If your Directors Loan Account is currently overdrawn you should take advice
If your company is facing insolvency and you have an overdrawn loan account, you should take action to find out where you stand and minimise your personal liability.