When a company goes into liquidation, a directors’ loan must be repaid to the business as part of settling its debts. This article will explore the various aspects that come into play when dealing with directors’ loans in the event of insolvency.

We will examine the legal rules, tax implications, and practical considerations, equipping you with the necessary information to behave according to the rules. By the end, you should have a comprehensive understanding of your obligations and options concerning a directors’ loan during liquidation.

What Happens to a Directors' Loan During Liquidation

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 the outstanding balance.

The liquidator’s role is to maximize 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 prioritized, 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 exactly is an overdrawn director’s loan account (DLA)?

A DLA is a record of financial transactions between a company and its director that are not salary, dividends, or expense repayments. It is simply a record of money that the director has borrowed from the company.

An overdrawn DLA occurs when the director has withdrawn more money from the company than they have put in. This can happen for a number of reasons, such as if the director has been using the company’s money to fund their personal lifestyle, or if the company has been struggling financially.

Is an overdrawn director’s loan repaid or written off in company liquidation?

In most cases, an overdrawn director’s loan account (DLA) must be repaid in company liquidation. The liquidator has a duty to maximize asset recovery for the benefit of the company’s creditors, and the DLA is an asset of the company.

The liquidator may decide not to pursue the debt if the recovery cost would exceed the actual recoverable amount. However, this is rare and depends on the specific circumstances of the liquidation process.

Here are some factors that the liquidator may consider when deciding whether to pursue the debt:

  • The amount of the overdrawn DLA.
  • The likelihood of recovering the debt.
  • The cost of pursuing the debt.
  • The impact on the company’s creditors.

If the liquidator decides to pursue the debt, they may take legal action against the director to recover it. The director may also be held personally liable for any debts that the company cannot repay.

What are the implications of running an overdrawn DLA?

Running an overdrawn DLA can have serious financial and legal implications, especially if the company goes into liquidation.

Tax implications

Prior to liquidation, an overdrawn DLA may attract tax consequences, including potential charges on both the company and the director. For example, the company may be subject to Section 455 tax, which is payable on overdrawn DLAs not repaid within nine months of the company’s year-end. This is currently levied at 32.5% of the overdrawn amount and must be repaid to HMRC.

Legal implications

Once liquidation is initiated, the director is legally obliged to repay the overdrawn amount. Failure to do so can lead to severe outcomes, including:

  • Legal action by the liquidator to recover the debt.
  • Charges of wrongful trading, which can lead to disqualification from serving as a director in future companies.

Other implications

In addition to the tax and legal implications, running an overdrawn DLA can also:

  • Damage the company’s reputation and make it more difficult to attract investment.
  • Strain relationships with shareholders and other directors.
  • Cause personal financial hardship for the director.

Can’t Pay Back Director’s Loan?

If you are unable to repay an overdrawn director’s loan account (DLA) during liquidation, it is important to seek professional advice immediately from a qualified accountant or lawyer. They can help you to assess your options and obligations under the current regulations and develop a plan to repay the debt.

Here are some things you should keep in mind:

  • The liquidator is legally obliged to recover the debt on behalf of the company’s creditors. This may involve taking legal action against you, such as obtaining a court judgment.
  • If you fail to repay the debt, it could have a serious impact on your personal finances and credit rating. It could also lead to personal bankruptcy and disqualification from acting as a director in the future.
  • In some cases, it may be possible to negotiate a repayment plan with the liquidator. However, this is at the liquidator’s discretion and will only be considered if it is in the best interests of the creditors.
  • You may also consider refinancing personal assets to repay the DLA. However, this carries its own risks and should be carefully evaluated.