What is an Overdrawn Directors Loan Account?
How to Deal with an Overdrawn Directors Loan Account in a Liquidation
What is a Directors Loan Account?
In simple terms a directors loan account is a record of all transactions between the company and the director.
For example a director uses his personal credit card to pay for some company expenses, therefore the Company will owe that sum to the director and that sum will be credited to the director’s loan account.
Conversely if the director used the company’s credit card to purchase some personal items then the director will owe that sum to the company and that amount will be debited to the director’s loan account.
The loan account records these transactions and keeps a running balance of the ins and outs, or debits and credits.
Overdrawn Directors Loan Accounts and Liquidation
An overdrawn directors loan account is where the director owes money to the company. When a company is placed into liquidation the Liquidator will ask the director to repay the balance on that account to him or her.
Accountants often recommend that directors, when they are also shareholders, should be remunerated through a small salary, to keep up to date with National Insurance Contributions, and for the balance to be taken through drawings. This reduces the director’s personal tax bill by using the more favourable dividend tax rates.
Drawings are where the directors take money from the Company, which usually means that the balance on the directors loan account is overdrawn, i.e. the director owes that money back to the company.
Usually once a year, at the year end, the accountant determines what profit the company has made and then declares a dividend, which is then credited against the directors loan account, which clears the overdrawn balance.
The problem can come when a company starts to get into financial difficulty and therefore does not have any profits with which dividends can be declared. This is often not appreciated by directors, so that when a company is placed into liquidation, there is an overdrawn balance on the loan account, which needs to be repaid to the liquidator. This can come as quite a shock to directors.
As a liquidator there is very little that can be done retrospectively, which is why it is very important that directors are advised by their accountants to monitor the situation to see what profits there are. If profits are reducing, tax saving will no longer be an important consideration and it may well be better for the director to be remunerated through the payroll, rather than drawings and dividends.
If a company is placed into liquidation, and there is a balance owing on the directors loan account, that loan account is an asset of the Company and the Liquidator has a statutory duty to realise it.
Reductions & Repayment
As Liquidators we do try to look at the matter fairly and reasonably. For example the director may have expenses which they have not claimed or they may have paid company’s expenses on their personal credit card, when there was insufficient funds in the company.
Accordingly it is important for a Liquidator to undertake a financial reconciliation of all monies in and out the Company’s bank account and record the relevant transactions on the directors loan account. A Liquidator should also ask the directors for receipts and evidence to support any claim that the directors may be able to make.
These amounts, if correct and verified, can be deducted from the directors loan account which will reduce the balance that the director owes the Company.
If there is still a balance outstanding an arrangement will need to be entered into with the Liquidator to repay that loan account. It may be that the director can repay the balance on the loan account using their personal savings.
However, usually directors do not have access to lumps sums as they have already used their savings to try and keep the company afloat. In these circumstances it may be possible to enter into a payment plan to repay the overdrawn balance over a period of time.
If you have an insolvent company and have an overdrawn directors loan account Purnells are always happy to have free meeting with you to run through the facts of the matter and see what options are available to best deal with the insolvency of the company and also your overdrawn loan account. Please either call 01326 340 579 or email at firstname.lastname@example.org
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