What happens to my Director’s Loan Account (DLA) if I close and liquidate my insolvent company?
In the event of liquidation, a director’s loan account (DLA) will come into question if it’s overdrawn. The director 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.
A director’s loan account (DLA) is a record of transactions between a company and its directors aside from the salary and dividends. A director may lend the company money to fund day-to-day trading or the purchase of assets, making the director a company creditor.
If you are unsure on the position of your director’s loan account, you can speak to your accountant.
What happens to a Directors Loan Account in liquidation?
When a company goes into liquidation, the treatment of a director’s loan account 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.
If you’re worried about your company’s financial position and want to learn more about how a DLA is handled in liquidation, it’s important to seek advice from a licensed insolvency practitioner such as Wilson Field as quickly as possible. We can offer free, confidential advice and a no-obligation consultation to discuss your company’s options.
Can you write off a director’s loan account?
Under certain circumstances, an IP may write off the loan if there is no means of repayment, however, usually, an overdrawn DLA will not be written off 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:
Equipment bought for the company through personal means.
Payments are 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.
What if you can’t repay a director’s loan account?
If a director can’t afford to repay their overdrawn DLA, one of our insolvency practitioners will consider the director’s personal financial position and assess their 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 represents the best possible return for creditors under the circumstances. This could either come in the form of a lump sum, or a payment plan that the director can realistically afford.
Writing off the loan Where recovery is not possible and the director has no assets, or means of repayment, the IP may write off the loan. 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 a director, such as an Individual Voluntary Arrangement (IVA) or bankruptcy. These processes can help manage the director’s liabilities including the director’s loan account.
How we can help
Our experienced initial advisors can discuss any concerns you have over a director’s loan account. We can also assess the company’s solvent position and assess the options available.
Speak with our initial advisers via phone or online chat. If we can help, we will arrange a free consultation with one of our consultants to discuss your situation in more depth.
During the consultation, we will advise if an insolvency procedure is the most appropriate route forward, or what alternative options are available.
After your consultation, if there is an appropriate route forward, we will issue the relevant documentation for you to formally engage us.
In summary
A director’s loan account is a record of transactions between a director and the company. An overdrawn director’s loan account is classed as an asset to the company and in liquidation, an insolvency practitioner will look to recover the DLA, which a director will be personally liable for repaying.
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.
We are not tax advisors. For more specific and tailored advice, you should speak to an independent tax advisor.