Can I close a company with an overdrawn director’s loan account?
Paying yourself a salary and receiving dividends on company profits are not the only ways to take funds from a limited company. As a company director, you can also pay money into the business or take it out using a director’s loan. You must record the transactions in a director’s loan account, which is included in the balance sheet.
When you take more money out of the company than you pay in, your director’s loan account is overdrawn. As long as the company is profitable, an overdrawn director’s loan account (DLA) isn’t a problem. You have nine months and one day after the company’s financial year-end to repay the money to avoid a tax penalty.
However, if the company’s performance dips and it enters insolvent liquidation, an overdrawn director’s loan account can have serious implications for you personally.
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What happens if I liquidate a company with an overdrawn director’s loan account?
When you enter liquidation, your overdrawn director’s loan account becomes a business asset that the liquidator will look to recover. That’s the case whether you enter insolvent liquidation voluntarily through a Creditors Voluntary Liquidation (CVL) or a creditor forces you into Compulsory Liquidation.
The liquidator’s job is to close the company and distribute as much money as possible to the company’s creditors. They do that by selling the business’s assets and pursuing funds owed to the company by its debtors, including the overdrawn director’s loan. That boosts the funds available to the unsecured creditors, who often receive little of the money they are owed from the liquidation process.
How does a liquidator recover an overdrawn director’s loan account?
A licensed Insolvency Practitioner must be appointed to manage the liquidation process. They will ask you to repay the money you owe the company. If you are unable or unwilling to repay the overdrawn DLA, the liquidator can pursue you through the courts. That will put personal assets, including your home, at risk, and you could even be forced into bankruptcy or sequestration in Scotland.
However, those aren’t the only risks. As part of their role, the liquidator will also investigate the reasons for the company’s decline and the directors’ conduct leading up to the liquidation. If they find that your overdrawn director’s loan account contributed to the company’s collapse, you could be disqualified from acting as a company director for up to 15 years.
What are the rules around overdrawn directors’ loan accounts?
Overdrawn directors’ loan accounts are not a problem in the normal course of business. Most directors take a small salary for tax reasons and receive the rest of their pay in dividends. However, sometimes they may also take a loan from the company to help pay for personal expenses.
As long as they properly document the loan, get shareholder approval for sums over £10,000 and repay the loan in full by the deadline to avoid paying income tax, it shouldn’t be a problem.
The issue comes when the company is struggling. You might assume you’ll be able to repay the loan, but low or no profits may prevent you from taking your usual salary or dividends. Some directors also mistakenly think that overdrawn directors’ loan accounts are written off in liquidation, but that’s not the case and the liquidator will take the necessary steps to recover the money.
I have an overdrawn director’s loan account and my company is struggling – what should I do?
Given the potential consequences of having an overdrawn DLA on liquidation, you should always be aware of your balance and repay the loan as quickly as possible. Even if your business is currently profitable, it’s worth putting a plan in place to repay the loan in case it starts to decline.
Understanding your responsibilities as a company director and knowing you will be liable to repay the loan on liquidation is a good starting point. The next step is to seek professional help. An Insolvency Practitioner will discuss your situation with you and advise you on your next steps.
If the amount you owe is relatively insignificant, the liquidator may decide not to pursue it. Alternatively, if you cannot pay what you owe in full, you might be able to negotiate an agreement with the liquidator to repay the loan over time and protect your personal assets.
Need professional advice?
If you have an overdrawn director’s loan account and believe your company is heading towards liquidation, contact our Insolvency Practitioners at your earliest opportunity. We’ll discuss your best options and the potential consequences if you can’t pay. Please get in touch for a free same-day consultation or arrange an in-person meeting at one of our offices in Scotland.
I knew I needed to close my company but I wasn’t sure how to go about this with large debts that I was unable to repay. Scotland Liquidators clearly explained my options and held my hand throughout the entire process.
Catherine Muller | Director
I would highly recommend Scotland Liquidators to anyone considering closing their business. From the first phone call I knew where I stood and what my options were. I cannot thank them enough.
Jonathan Booth | Director
Scotland Liquidators helped me close my company last year after I made the tough decision to stop trading. My advisor was patient, knowledgeable, and supportive from start to finish. Many thanks.
Colin Franklin | Former CEO
