Overdrawn director’s loan account: options where your company is facing insolvency

If your company is in financial distress and you have an overdrawn director’s loan account that you cannot afford to repay, then you need to seek immediate legal advice.

There are several important issues to consider:  your company’s potential insolvency, your duties as a director, your own personal liability and possible bankruptcy, and the possibility of director’s disqualification proceedings.

As Michael Clinch, our insolvency law expert explains:

‘An overdrawn director’s loan account will immediately attract the attention of a liquidator. A liquidator is obliged to push for the repayment of what is effectively a company asset and to review any pre-insolvency attempts you may have made to deal with your liability to the company, for example by getting the company to write off your debt.’

This will be unwelcome news if you have little or no personal funds available to pay what is owed.  As Michael notes, ‘It may be possible to challenge the claims of the liquidator, and to get yourself into a position whereby you can come out of the insolvency process with your own financial security intact, but you need to seek help quickly to avoid incurring significant legal costs and give yourself the best chance of a positive outcome.’

How we can assist

With our support, we can help you to come up with a plan of action that will enable you to get through your company’s collapse.  We can:

  • review your director’s loan account and determine whether there is any scope for the amount by which you are overdrawn to be reduced, or even extinguished, for example by taking in to account any claims for reimbursement of costs and expenses that you have incurred on the company’s behalf or for company business;
  • advise you on the likelihood of a liquidator being prepared to take formal action to recover the monies that are owed;
  • explore ways in which you might be able to restructure your finances, raise funds or realise assets to ensure that any liability can be settled; and
  • negotiate with the liquidator to come up with an acceptable resolution or a repayment plan which will enable you to repay what you owe via instalments.

Where the liquidator decides to play hard ball by pursuing you through the courts, we can also provide you with robust representation to give you the best chance of emerging from court proceedings on the most favourable and manageable terms.

Back to basics – what is a director’s loan account?

A director’s loan account is essentially a ledger which records all financial transactions between you and your company, including those in which you have taken out company money other than via the payment of salary or dividends.  It is common practice and does not usually cause any difficulties, provided you have put arrangements in place to ensure that any monies owed are periodically repaid.

The problem is that overdrawn amounts can swell to significant sums which can be hard to repay if a company begins to experience financial difficulties.

An overdrawn director’s loan account will immediately attract the attention of a liquidator.

As an aside, failure to repay loan amounts periodically can also trigger corporate and personal tax liabilities. Penalties can be imposed and interest charged where a director’s loan account is allowed to rise above a certain amount and where the sums owed are not repaid within nine months from the company’s year-end.

What if the company agrees to write off any overdrawn amounts?

It is not unusual for directors to arrange to have the company write off any sums that may be owed in respect of an overdrawn account in the mistaken belief that this will resolve the issue.  However, liquidators have the power to overturn such arrangements, to have them declared void, or formally set aside, and so you may still face a liquidator’s claim. The same is potentially true where you seek to have the amounts owed declared as a dividend or a one-off bonus payment.

What sorts of costs and expenses can be claimed to offset the sums owed?

There are a number of legitimate costs and expenses that can be claimed in order to try to reduce the amount that you owe under a director’s loan account.  These include travel and subsistence expenses, corporate hospitality costs and any monies expended by you on the purchase of goods and services on the company’s behalf using your own credit or debit card.

We can help you to identify any costs and expenses that can be recouped lawfully.

By talking to us at an early stage we can help you to identify any costs and expenses that can be recouped lawfully, thereby enabling you to get your director’s loan account down to the lowest feasible level. We recommend that you take legal advice before the company is put into liquidation. If you have been served with a Creditor’s Petition or you know that the company is not paying its debts as they fall due, or you know that the company’s balance sheet is faltering, you should get advice immediately.

What action might I face where I cannot repay what is owed?

The action that a liquidator decides to take against you will depend on the circumstances, but may include demanding that you sell personal assets, including your home, to cover what is owed – in default of which, they may petition for your bankruptcy.

Where you have used your position as a director to try to have your overdrawn loan account unjustifiably written off, or declared as a dividend or bonus, they may also accuse you of misfeasance or of being party to a preferential transaction or a transaction at an undervalue, all of which could lead to the issuing of a director’s disqualification order.

You need to seek help quickly to avoid incurring significant legal costs and give yourself the best chance of a positive outcome.

It is therefore vital that you take advice on your position as soon as you realise that your company may be in financial difficulty, and particularly where you need help in defending or mitigating the effect of a potential wrongful action claim or in finding a way to avoid your own personal or professional ruin.

For further information, please contact Michael Clinch on 020 7845 7400 or via email at michaelclinch@iwg.co.uk.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published