What happens to my Director’s Loan Account if I liquidate or close my insolvent company?

Limited company directors may take money from their company outside of salary and dividends through a Director’s Loan Account (DLA). While this isn’t normally an issue if the company is solvent, issues can arise if the loan hasn’t been repaid and the company becomes insolvent. Should the directors choose to liquidate or close the company, Director’s Loan Accounts can become a complex issue, especially if they are overdrawn.

What is a Director’s Loan Account?

A Director’s Loan Account is a record of transactions between a company and its directors outside of salary and dividends. Borrowing money in this way would leave the company with an ‘overdrawn director’s loan’ until the amount borrowed is repaid. In some cases, a director may lend the company money to fund day-to-day trading and the purchase of assets as an alternative to investing the money in share capital. In this situation, the director is a creditor of the company. Until the director in receipt of the borrowed funds repays it, that director is a debtor of the company. Any outstanding balance needs repaying within nine months of the end of the company’s accounting period.

Having an accountant monitor any DLA can help track the borrowing, allowing you to stay on top of any required repayments.

What happens to a Director’s Loan Account in liquidation?

When a company becomes insolvent, it can no longer pay its liabilities when they fall due, and issues can arise in insolvency if the Director’s Loan Account is overdrawn and the director is without the funds to repay.

A Director’s Loan Account is considered a company asset until it’s fully repaid.

Should the company enter liquidation with an unpaid Directors Loan Account, the liquidator will scrutinise it and often view one as a recoverable company asset. As such, they’ll expect the director to repay it.

Directors finding their company in such a position should seek advice from a licensed insolvency practitioner like ourselves, who can assess the situation and propose a solution tailored to your circumstances.

How we can help

Since Director’s Loan Accounts can be complicated, especially when they become overdrawn if you find yourself with one and your company is heading towards insolvency, you could benefit from confidential advice tailored to your company’s circumstances. Speak to us, and we can help guide you through the options best suited for your circumstances.

In summary

Directors can borrow money from their limited company through a Director’s Loan Account. There isn’t normally an issue with borrowing money in such a way as long as it’s repaid within nine months of the end of the company’s accounting period and the company remains solvent. Issues can arise if the amount is not repaid in time, or the company becomes insolvent. Should the latter occur, and the director chooses to liquidate the company without the funds to repay the overdrawn Director’s Loan Account, the liquidator could pursue the director for the owed amount.

Since overdrawn Director’s Loan Accounts can be complicated, especially in insolvency, speak to us for free, impartial advice tailored to your circumstances.

FAQs

Can a company write off an overdrawn Director’s Loan Account?

A company may try to write off a director’s loan if the director can’t repay it. However, doing so won’t always stop a liquidator from pursuing the amount if the company enters liquidation. The director may be able to reduce their personal liability if they are owed business expenses such as mileage.

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.

We are not tax advisors. For more specific and tailored advice, you should speak to an independent tax advisor.

Help for debts to HMRC

Can an overdrawn Director’s Loan Account lead to a director’s ban?

If the director can’t repay the overdrawn Director’s Loan Account during a liquidation, they could face additional measures on top of being out of pocket. The liquidator will pursue the director for the monies owed, which could result in personal bankruptcy. If evidence of misconduct or wrongful trading is found, they could face director disqualification, a ban that could last from two to 15 years.

More on wrongful trading