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“I have an overdrawn directors loan account with my company. How will this affect me if the company is insolvent or having cash-flow problems?”

Overdrawn Directors’ Loan Account

If you have taken dividends from your company whilst the company is insolvent these dividends are known as Ultra Vires -meaning beyond you power, or authority. In other words the director has paid him/herself when they should not have and acted beyond their powers. Commonly called illegal dividends, they may be entered on the accounts as borrowed money from the company. If you do not repay this money – it is essentially an offence from a tax perspective and this is known as anoverdrawn directors’ loan account. When a company becomes insolvent this can have serious personal implications for you if it is not addressed properly. When you consider that, on average, over 70% of all directors in the UK have an overdrawn director loan at some point or another it is considered to be a large problem.

So how does an overdrawn director loan occur?

The most common way is when a director takes advice from an accountant who tells them to take a minimum salary to keep national insurance and tax at the lowest levels. The remainder of the remuneration is then taken as dividends. At first, everything works fine until something goes wrong with the cash-flow years later and the company runs into problems. The company may not be making the same profits as before or the company may have to close due to unforeseen circumstances.

The problem also impacts on creditors. If you see it from their point of view, they may argue that you have spent their money. In any event, you become a debtor; owing money to the company. If the company is forced into liquidation and even in voluntary liquidation the problem is compounded as a liquidator acts for the creditors and he/she will be expected to recover this money for the creditors. Unfortunately, a company voluntary arrangement would still have the same issue and would not resolve the problem as the overdrawn directors’ loan account would still need to be addressed appropriately. Finally, if the company is subject to a winding up petition the situation is in the hands of the official receiver. The overdrawn directors’ loan account may make matters worse and a director could be accused of trading irresponsibly (wrongful trading), which can have serious consequences. You should seek professional advice immediately if you are faced with these situations. You can also have a look at our common business challenges page to get solutions to the most common challenges faced by directors.

How we can help:

If the company is forced into liquidation and you do not have anyone sitting between you and the liquidator you will be managing the situation yourself which can be pretty daunting if you do not know what you are doing and could have serious repercussions. We are very experienced in negotiating settlements with liquidators when it comes to overdrawn directors’ loan accounts. There is no magic wand, however, in the vast majority of cases we can benefit all parties by helping to negotiate a mutually acceptable repayment plan.

Key points to remember:


  • You should not be taking dividends if your company is not making a profit.
  • If your company is insolvent, you must avoid taking dividends as this will add to an existing overdrawn directors’ loan account.
  • A company voluntary arrangement may be an ideal solution for rescuing your company and helping to resolve your issues.
  • If your company is being forced into liquidation and you have an overdrawn director’ loan account then please speak with one of the team immediately to see if we can help negotiate a mutually acceptable settlement.

Prefer to talk? To speak with a specialist now – call us for a free, confidential consultation about how to tackle your overdrawn directors loan account on 08000 746 757 or use our live support feature at the top of the page.

Author: Mike Smith


CVA, otherwise known as a company voluntary arrangement, allows you to protect your company against legal action, as with administration, but with the purpose of creating a legally binding payment plan with your company’s creditors. The cva is tailored around your company’s cash-flow so that your company’s debts can be repaid, either in part, or in full over a maximum of five years. A cva is initiated by you (the director), not the creditors or shareholders.

When used correctly, a cva can provide a perfect tool to renegotiate troublesome trade agreements whilst allowing you to trade on through a financially challenging period. This solution should only be considered if you believe your company is viable, but needs some help to trade through.

A CVL is also known as a creditors voluntary liquidationIt is a solution that allows you to close your company with or without the permission of creditors and it allows the company to write off unsecured debts. This type of liquidation is initiated by you (the director), not the creditors as the name may lead you to believe. Choosing the right insolvency practitioner can be critical when considering liquidation. Ask to speak with previous clients as testament to their services before committing to any company to carry out a creditors’ voluntary liquidation.

pre-pack can refer to pre-pack administration or pre-pack liquidation, either way, the solution involves having a future buyer lined up to purchase the more profitable parts of the business, whilst leaving the debts behind. It is important to obtain specialist help immediately if you think this may be a viable solution for your company as strict procedures must be followed if you, as a connected person, are considering purchasing your company’s assets. Nevertheless, if your business is generating revenue producing contracts, has sizable assets or properties, but they are under threat from serious litigation or angry creditors; a pre pack administration can provide a very powerful legal solution for your company.

Administration is a very powerful legal tool that can be used to; first, stop legal action against your company and then:
Get a better return for the creditors than would be obtained via an immediate liquidation, or rescue your company from financial difficulty as it provides you with more time allowing for a rescue strategy to be put in place for everyone's benefit.

There are two key tests/questions that apply to companies when defining whether it is insolvent or not and they are:

  1. The cash-flow test: Can the company pay its bills when they are due?

If the answer is NO, then your company is likely to be insolvent and you should seek advice. 

  1. The balance sheet test: Do your company’s debts outweigh the company’s assets?

If the answer is YES, then your company is likely to be insolvent and you should seek advice.

No. Insolvency does not have to spell the end for your business as there are a number of tools that we can use to secure both your future and/or your company’s future whilst protecting you fully and minimising any potential risks.

Around 70% of directors have a problem with an overdrawn directors loan account at some stage.  Most commonly, the director seek advice from an accountant who tells him/her to take a minimum salary in order to keep national insurance and tax at the lowest levels and to then take dividends to supplement their income. This then causes an unpaid debt which is owed to the company. This is very acceptable tax advice until something goes wrong which could be a sharp, unexpected drop in revenues for whatever reason or a threat of a winding up petition from HMRC. The directors then become debtors (someone who owes money) to the company and any liquidator, has a duty to pursue the director to the point of bankruptcy, if the debt cannot be repaid. 

Around 70% of our work involves HMRC in one way or another, including providing advice on distraint warrants, winding up petitions, negotiated settlements, time to pay arrangements, field officer visits, compliance team visits and more. 

In the vast majority of cases you pay us nothing at all. When an insolvency solution is required such as a cva, administration or liquidation - we get paid for all of these by completing the field work for the insolvency practitioners. This relationship benefits you in more than one way: As you may already know, once an insolvency practitioner is engaged by your company they are duty bound to work for the creditors. So once engaged, an insolvency practitioner cannot address any potential personal implications that may be directly caused by the insolvency process as it would be a direct conflict of interests for them to do so. Jameson Smith & Co puts your protection first, whilst working with the insolvency practitioners so you have full peace of mind.

A directors' personal guarantee is essentially a promissory note to pay an organisation regardless of your company failing or going into liquidation. At some stage you may have signed an agreement with the bank or another trade creditor, making you personally liable for a specific debt. Once you realise that your company is heading towards insolvency you should seek advice on how to tackle this situation immediately if you are in any doubt about what to do.

Banks will often support personal guarantees with a charge on the family home and, or a debenture usually a fixed and, or floating on the company assets.

We specialise in helping directors address their personal guarantees and providing solutions to allow the directors to exit the situation in the best financial shape possible.

Read our page on directors' personal guarantees for more information on how we can help you.

winding up petition is the application for a forced/compulsory liquidation of a limited company or partnership. This is usually initiated by a creditor (person/business that your company owes money to). Winding up petitions should never be ignored. There can be serious implications if communication with the relevant creditor or immediate action is neglected at this stage.

statutory demand is a documented written request, usually sent from a creditor for payment of a debt that is owed. You would have 18 days to negotiate a settlement or ask the court to set-aside (dismiss) the demand. If no settlement is made after 18 days from receiving the statutory demand you are given a further 3 days to pay in full. This is a very serious document and should not be ignored in any circumstances. After the 21 day period has lapsed and if there is no response to the document, the creditor can then petition to court for a winding up order for a debt as little as £750.


Terms & Conditions

Terms & Conditions

This site is provided for directors seeking help and seeking advice in insolvent situations and we try to provide a more user friendly experience by tracking your IP address and by using cookies. This is common practice in most online businesses these days. By accessing this website you agree to abide by our simple rules. They are: If you are visiting this site seeking help for a genuine company insolvent situation then the access is free. However, we also protect this site against visits from fraudulent and virus attacks. We therefore reserve the right to ban anyone from misuse of the site for the benefit of those directors seeking help. We will also take vigorous legal action against those being proven to have visited this or any of our websites for fraudulent and or mischievous purposes and will seek financial compensation.
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