What happens to my Director’s Loan Account (DLA) if I close and liquidate my insolvent company?
When your company goes into an insolvent liquidation, known as a Creditors Voluntary Liquidation (CVL) the treatment of a Director’s Loan Account (DLA) depends on whether the account is in debit or credit.
- DLA in debit
An overdrawn directors loan account is treated as an asset to the company and a director is expected to repay the loan. If the director isn’t able to repay the overdrawn DLA, an insolvency practitioner can explore alternative routes with the director. - DLA in credit
If the director’s loan account is positive in insolvency, the director will become a creditor to the company and will stand in line with other creditors to be repaid. Typically, a positive DLA will be paid after secured and preferential creditors. The likelihood of repayment depends on the company assets available and the amount owed to other creditors.
As director, you will be personally responsible for repaying an overdrawn account, as it is considered an asset to the company and is unlikely to be written off or discharged through liquidation.
What is a Directors 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. You may lend the company money to fund day-to-day trading or the purchase of assets, making you a creditor to the company.
Do I have to repay my Director’s Loan Account?
Under certain circumstances, an IP may consider partial repayment if your financial means dictate that you cannot pay it in full. However, usually, an overdrawn DLA will not be disregarded in full as the outstanding balance is an asset to the company.
There are reasonable claims a director can make to reduce the size of an overdrawn director’s loan account, including but not limited to:
- Personally funded company equipment
Equipment bought for the company through your own personal finances. - Company payments made personally
Payments which are made on the company’s behalf by you, the director, personally. - Outstanding business expenses
Business mileage and other expenses that have not already been taken into consideration. - Accrued dividends
Dividends that have been declared from sufficient profits but not paid.
What if I can’t repay my Director’s Loan Acount?
If you can’t afford to repay an overdrawn DLA, one of our IPs will consider your personal financial position and assess your affordability to repay. We can explore:
- Negotiated settlement
Our IP may negotiate a settlement that is less than the full amount of a DLA, but that represents the best possible return for creditors under the circumstances. This could either come as a lump sum, or a payment plan that you can realistically afford. - Whether the loan is uncollectable
In certain circumstances, if recovery is not possible or there are no assets, or means of repayment, the IP may consider that the loan cannot be recovered. This decision is not taken lightly and will typically only happen if there is no alternative route. - Personal insolvency options
We can explore personal insolvency options for you, such as an Individual Voluntary Arrangement (IVA) or bankruptcy. These processes can help manage your liabilities including the director’s loan account.
How we can help you with an overdrawn DLA in liquidation
If you are concerned about the financial position of your company, or you’re worried about the possible effects of having an overdrawn DLA, our experienced initial advisors can offer free, confidential advice. We can discuss with you how your DLA may be treated during an insolvent liquidation and offer the best solutions available.
- Close your company down via a Creditors Voluntary Liquidation (CVL)
A CVL is a liquidation procedure for companies that are insolvent. The process will formally close and liquidate your company, ceasing its trading operations, realising any assets, and removing the threat of creditor legal action. If your company has employees, they can claim for redundancy and other statutory entitlements through the government’s Redundancy Payment Service (RPS). The process is final and irreversible. Once completed, your company’s unsecured debt will be written off and the company is dissolved, allowing you, the director, to move on.
Find out more about Creditors Voluntary Liquidation - Close your company down and start again via a pre-pack liquidation
A pre-pack liquidation is a type of CVL where the sale of your company’s assets is arranged before liquidation, allowing business operations to continue seamlessly under the purchasing company. The company name may be reused, and employees can transfer under TUPE. Contracts and essential agreements can also be included as part of a sale, ensuring minimal disruption to your business operations. This process eliminates the unsecured debts of your previous company, providing a fresh start free from previous unsecured liabilities.
Find out more about Pre-pack Liquidation
How to get in touch with us: The next steps
- Speak with our initial advisers
Make contact with our team, via phone, filling in a form, or online chat. We will assess your circumstances and, if suitable, arrange a free consultation with a consultant to discuss your company’s situation. - Initial assessment
During the consultation, we will advise if an insolvency procedure is the most appropriate route forward or whether alternative solutions better suit your company’s problems - Formally engage with Wilson Field
If there is an appropriate insolvency solution, we will confirm the necessary steps to start the procedure and will issue you with the relevant documentation for you to formally engage us.
In summary
A Director’s Loan Account is a record of transactions between you, the director, and your company. An overdrawn director’s loan account is classed as an asset to your company and in liquidation, an insolvency practitioner will look to recover the DLA, which you can be personally liable for repaying.
We can offer you free, confidential advice and guidance as to what will happen, if you have an overdrawn DLA in liquidation and we can help you explore realistic options for a settlement based on your circumstances or look to reach an agreement.
FAQs
Is an overdrawn Director’s Loan Account illegal?
Having an overdrawn Director’s Loan Account is not illegal. That said, directors shouldn’t borrow more than £10,000 from the company unless they have approval from all the company’s shareholders. In many small companies, the directors are also the shareholders.
Once a director takes money out of a company, it should be well-documented to prevent borrowing from spiralling without any plan to repay the loan.
Do you have to pay tax on a Director’s Loan?
Any money a director takes out of a company not classed as a dividend or salary and exceeds the value of the money put in is classed as a taxable benefit for the director. HM Revenue & Customs (HMRC) view a Director’s Loan as an interest-free loan from which the directors have benefited. The director will be expected to pay income tax on this.
Help for debts to HMRC
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