What Happens to My Overdrawn Director’s Loan Account in Liquidation?

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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10th April 2024

What happens when a director owes a balance to the company at the time of liquidation? I’ll cover this subject in detail, covering the consequences and potential solutions below.

Is an Overdrawn Director’s Loan Repaid or Written Off in Company Liquidation?

In a company liquidation, an overdrawn director’s loan is typically expected to be repaid by the director to the company. Liquidation means that the company is closing down permanently, and its assets are sold off to pay creditors.

Going Through Liquidation with an Overdrawn Loan Account

During liquidation, the appointed liquidator’s job is to collect all debts owed to the company to maximise the return to creditors. This includes pursuing repayment of overdrawn DLAs.

The liquidator will assess the company’s financial situation and may ask the director to repay the overdrawn amount. If the director cannot repay, the liquidator might take legal action to recover the funds.

It is important to note that you cannot write off the loan or offset it against future dividends once the company is in liquidation. Your obligations to settle the overdrawn DLA are prioritised, as the aim is to repay the company’s creditors to the fullest extent possible.

If you have an overdrawn DLA, it is important to seek professional advice from an insolvency practitioner such as ourselves. We can help you understand your options and develop a plan to repay the debt.

What Liquidators Do with Your Overdrawn Account

A liquidator, who is appointed to oversee the liquidation process, will review the company’s financial records, including any director’s loan accounts. Their job is to recover as much money as possible for the creditors, and this includes recouping the money from ODL.

The liquidator will first ask you to repay the overdrawn amount. This request can lead to a formal demand for payment. If the situation allows, they may agree on a repayment plan. However, if repayment isn’t possible or if a director refuses to comply, the liquidator has the authority to take further action, which can include legal proceedings.

Legal Problems from Not Paying Back Your Loan

Failing to repay an overdrawn director’s loan can lead to several legal problems.

Firstly, the liquidator could take you to court to recover the funds. This can result in a court order against you, compelling you to repay the debt. If you’re unable to do so, this could lead to personal bankruptcy proceedings.

Moreover, there’s a legal obligation to treat all creditors fairly during the liquidation process. If you’ve taken company money for personal use and can’t repay it, you’re effectively putting your interests above those of other creditors. This can lead to accusations of wrongful trading.

The Insolvency Service may also examine your actions closely. When a company goes into liquidation, an investigation is launched to determine why it failed. Should an overdrawn director’s loan account emerge as a contributing factor to the company’s financial troubles, you might be found partially accountable for its downfall

In cases where unfit conduct or misfeasance is discovered, directors can face disqualification for up to 15 years, preventing them from acting as a director of any company.

How Overdrawn Loan Accounts Affect Liquidation

If significant amounts are tied up in DLAs, it can mean less money is available to distribute, affecting the company’s ability to settle its debts fully.

This can have a direct impact on the company’s creditors, including suppliers, lenders, and even employees who may be owed money. In a situation where funds are limited, the repayment of an overdrawn DLA can mean that unsecured creditors receive a smaller portion of what they are owed, or in some cases, nothing at all

What about Illegal Dividends?

When a company is facing liquidation, the scrutiny over its financial transactions intensifies, particularly concerning the legality of dividends paid out. Illegal dividends, also known as unlawful dividends, occur when distributions to shareholders are made without sufficient profits to cover them, essentially rendering these dividends as drawings against the capital of the company rather than distributable reserves.

Dividends declared and paid out at a time when the company was not in a position to do so legally, increase the overdrawn balance of a Director’s Loan Account, compounding the director’s liability to the company.

Upon the appointment of a Liquidator, part of their role is to examine antecedent transactions, including the declaration and payment of dividends. Paying out illegal dividends can lead to serious legal implications for directors, including accusations of wrongful trading or breach of fiduciary duty. This can result in personal financial consequences beyond the repayment of the dividends themselves.

What Can Directors Do?

Facing an overdrawn Director’s Loan Account during liquidation can be daunting, but there are several steps you can take to navigate this challenge effectively and minimise potential legal and financial repercussions.

1. Start by thoroughly reviewing the status of your loan account and documenting all transactions. This documentation will be crucial for any discussions with creditors, liquidators, or legal advisors.
2. It’s crucial to engage with a licensed insolvency practitioner (LIP) early. We can offer you expert advice on the implications and guide you through the liquidation process. We can also assist in negotiating repayments or settlements that might be required to address the overdrawn account.
3. If possible, you should consider how to repay the overdrawn amount to the company. We can advise on structuring such repayments in a way that is manageable for you and legally compliant.

Seek Professional Assistance

Navigating the complexities of an overdrawn director’s loan account and the potential liquidation of your company can be daunting. It’s crucial to seek the advice of a licensed insolvency practitioner at the earliest opportunity.

Taking this step can significantly impact the decisions you make about your company’s future, ensuring they are informed and strategic. Contact us now on 08000 746 757 to learn how we can support you.

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