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What happens if a director cannot pay their overdrawn directors’ loan account?

What happens if a director cannot pay their overdrawn directors’ loan account?

When you take money from your company that’s not in the form of a salary, dividend, expense claim, or repayment of investment, the transaction is put through your director’s loan account (DLA) in the company’s books. 

Your DLA records all the money you’ve invested in the company, and all withdrawals. In general, an overdrawn director’s loan account isn’t a problem as long as the amount of money withdrawn isn’t excessive, and is repaid within a certain timescale.

An issue does arise, however, if the company begins to struggle financially and enters insolvency. An overdrawn DLA represents an asset of the company that can be reclaimed by the appointed insolvency practitioner should the business not recover and need to be liquidated.

Reprieve if your company’s viable

If your company is believed to be viable in the long-term, it may be possible to restructure its debts within a formal insolvency process called a Company Voluntary Arrangement, or CVA.

This arrangement allows for debt to be repaid without further interest being added, and as long as repayments are made as agreed, your company is protected from creditor legal action.

You carry on trading whilst a CVA is in place, and this gives you time to pay back the money you owe to the company. It’s unlikely under these circumstances that you’ll be able to extend your DLA further, but this solution effectively holds off the threat of personal bankruptcy.

CVAs require 75% of creditors (by value) to vote in favour of the proposed repayment plan, however, and if it isn’t voted through or the agreement terms aren’t met at some point in the future, the business could face liquidation.

Overdrawn directors’ loan accounts and liquidation

An overdrawn DLA represents a significant threat to your personal financial security once your company becomes insolvent. If the business is liquidated, the office-holder will require immediate repayment of the money in full.

You may also have provided personal guarantees to lenders for business borrowing, in which case, as the business is to be liquidated, these are also likely to be triggered.

In practice, the liquidator will examine the company’s books and accounting records to see where money can be recovered. They’ll also check the accuracy of the figures in your director’s loan account to ensure they reflect the total amount of money you’ve invested.

Repercussions of being unable to repay an overdrawn DLA

If you cannot repay the money you’ve withdrawn from your company, you may be forced into personal bankruptcy. A liquidator’s duty is to work in the best interests of creditors, and they’ll pursue you through the courts to recoup the company’s funds.

Clearly, personal liability under these circumstances is a serious situation that can threaten your home and other personal assets. The ‘veil of incorporation’ that provides protection for directors under normal trading conditions is effectively removed, leaving you at great financial risk, and potentially with no income.

Can you write off a DLA?

It’s not possible to write off an overdrawn director’s loan account. In fact, even if the company has previously written off your debt, the office-holder can reverse this action and make you personally liable, as they must act in the best interests of creditors.

The liquidator may be open to negotiations on the amount to be repaid, but this depends on the circumstances of each case. It’s highly advisable for directors to be open about any loans they’ve taken via their company, as this encourages trust between all parties, and can increase efficiency when a speedy solution is needed.

A further issue also arises as the Insolvency Service undertakes investigations into the actions of directors in cases where a company has been liquidated, and you may face disqualification from the office of director for up to 15 years.

Seek professional advice

A good accountant will be able to tell you more about directors’ loan accounts, and the risks involved in borrowing money from your company. Handpicked Accountants can offer a shortlist of fully qualified and reliable accountants in your region to help you deal with issues of this type.

Should your company be experiencing financial difficulties, or is in danger of entering insolvency, your accountant may also put you in touch with a licensed insolvency practitioner to ensure that you receive specialist guidance.

David Tattersall

Speak to a Handpicked Expert today

0800 063 9258

Hi there - I'm David from Handpicked Accountants. If you need help finding the right accountant, simply give me a call. My expertise is in connecting business owners with the very best professional services and I'm on hand to assist you today.

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