What is a director’s loan account?

A director’s loan account (DLA) is a record of transactions between a company and its directors aside from the salary and dividends. If you are a company director, you may have a director’s loan.

A director may lend the company money to fund day-to-day trading and the purchase of assets which would make the director a creditor of the company.

What is an overdrawn director’s loan account?

Any money a director takes out of a company which is not classed as a dividend or salary, and exceeds the value of the money you have put into the company, is classed as a taxable benefit for the director. Until the loan is repaid, this overdrawn DLA will be considered a company asset, so the director and the company should keep track of it.

An overdrawn director’s loan account is where you as a director have taken money of out of the company, which is not classed as a dividend or a salary and is more than any money you have put into the company. You would be deemed to be benefiting from a director’s loan, which still stands as a loan from the company to yourself.

Director’s loan account in insolvency

When a company becomes insolvent, a director’s loan account remains an asset of the company. This effectively means that the overdrawn DLA will be owed back to the company and used to repay any creditors of the company.

During the insolvency procedure a liquidator would look into whether the director’s loan account was overdrawn and if it was a considerable amount, would pursue that balance to ensure that it can be used in repaying creditors.

Can I be personally liable for a director’s loan account?

If a director takes out a loan from their company, they become personally liable for the loan, regardless of whether or not the company is facing insolvency. It is still a loan from the company to the director and it is the director’s responsibility to pay back that loan.

If the company falls on hard times and there is still an outstanding director’s loan account, the director will remain personally liable for the loan. At this point, you are not protected with limited liability, your own personal funds should be used to repay the director’s loan account.

How we can help

If you have an overdrawn director’s loan account and you’re worried that your company is in financial difficulty or potentially facing insolvency, we can discuss your options and what could benefit you most moving forward. We provide free, confidential advice that never goes any further, if you decide our services aren’t what you’re looking for.

Can you write off a director’s loan account?

During a liquidation procedure, the director’s loan account will always come under scrutiny, but that does not mean there are legitimate reasons to reduce the size of an overdrawn director’s loan account.

A director could have reasonable claims to reduce a loan through expenses such as:

• Equipment bought for the company through personal means.
• Payments made on the company’s behalf by the director personally.
• Business mileage and other expenses that have not already been taken into consideration.
• Dividends that have been declared from sufficient profits, but not paid.

In summary

A director’s loan account is a means of a director borrowing from and lending money to the company. Once a director takes money out of a company, it should be well-documented to prevent borrowing from spiralling out of control without any plan or structure to repay the loan. A director is always personally liable for any money they have taken out of the company, it is always their responsibility to repay it back to the company. If the company faces insolvency and there is an overdrawn director’s loan account, the director will be expected to repay that as it is an ‘asset’ of the company.

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