An overdrawn director’s loan account occurs when the director owes a balance to the company at the time of liquidation. Upon appointing a liquidator, they are required to attempt to recover any amounts owed by the directors, treating these as debts to the company.

I’ll cover the rules around this below.

What Happens to a Directors' Loan During Liquidation

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

In company liquidation, an overdrawn director’s loan must be repaid by the director. It is treated as a debt to the company and is not automatically written off. The appointed liquidator will seek to recover this amount to contribute towards the company’s debts.

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

If your company goes into liquidation, your overdrawn director’s loan account (DLA) becomes an asset of the company that must be repaid. As a director, you are personally liable for any outstanding balance.

The liquidator’s role is to maximise the value of the company’s assets to pay off creditors. As such, they will pursue you to repay the overdrawn DLA.

Legally, you are responsible for repaying the overdrawn DLA. If you are unable to do so, the liquidator can take legal action against you, which could include a court judgment against you. Failure to comply could have serious personal financial ramifications, such as damaging your credit rating or even leading to personal bankruptcy.

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 or other qualified professional. They can help you understand your options and develop a plan to repay the debt.

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.

Review and Document: 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.

Engage with a Licensed Insolvency Practitioner: 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.

Consider Repayment Plans: 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.

FAQs on Overdrawn Directors’ Loan Accounts and Insolvency

Immediately seek advice from a licensed insolvency practitioner. We can guide you through the insolvency process, help you understand your obligations regarding the overdrawn loan, and explore all available options.

Yes, directors can be held personally liable for repaying overdrawn loan accounts in insolvency. This is because the overdrawn amount is considered a debt owed to the company that must be settled to distribute funds to creditors.