What Happens to a Director’s Loan Account if the Company Enters Liquidation?

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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23rd April 2024

How is an Overdrawn Director’s Loan Account Handled in Company Liquidation?

In a company liquidation, an overdrawn director’s loan is typically expected to be repaid by the director to the company. Liquidation means that the company is closing down permanently, and its assets are sold off to pay creditors.

During this process, a liquidator is appointed to manage the closure and sale of company assets, aiming to maximise returns for creditors. This involves evaluating all of the company’s assets, including tangible items like property and machinery, as well as recoverable amounts like those owed through an overdrawn DLA.

When a Director’s Loan Account is in Credit During Liquidation

If a Director’s Loan Account (DLA) is in credit at the time of a company’s liquidation, it indicates that the director has lent money to the company rather than withdrawing funds. In such scenarios, the director is positioned as a creditor to the company, rather than a debtor.

A DLA in credit means the director has a claim on the company’s assets similar to other creditors, albeit typically as an unsecured creditor unless otherwise specified by prior agreements. The director with a credited DLA will be paid alongside other unsecured creditors, which generally occurs only if there are sufficient funds remaining after settling higher priority debts.

Given the nature of liquidation, where assets are often insufficient to cover all outstanding debts, there is a possibility that a director with a credited DLA might not receive full repayment. The exact outcome will depend on the total asset value recovered, the number of creditors, and their respective claims’ legal priority.

Going Through Liquidation with an Overdrawn Loan Account

During liquidation, the liquidator (insolvency practitioner) will first ask you to repay the overdrawn amount. This request can lead to a formal demand for payment. If the situation allows, they may agree on a repayment plan. However, if repayment isn’t possible or if a director refuses to comply, the liquidator has the authority to take further action, which can include legal proceedings.

It is important to note that you cannot write off the directors 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 such as ourselves. We can help you understand your options and develop a plan to repay the debt.

What are the Possible Consequences of Directors Loan Accounts in Liquidation?

Failing to repay an overdrawn director’s loan can lead to several serious consequences.

Firstly, the liquidator could take you to court to recover the funds. This can result in a court order against you, compelling you to repay the debt. If you’re unable to do so, this could lead to personal bankruptcy proceedings.

Moreover, there’s a legal obligation to treat all creditors fairly during the liquidation process. If you’ve taken company money for personal use and can’t repay it, you’re effectively putting your interests above those of other creditors. This can lead to accusations of wrongful trading.

The Insolvency Service may also examine your actions closely. When a company goes into liquidation, an investigation is launched to determine why it failed. Should an overdrawn director’s loan account emerge as a contributing factor to the company’s financial troubles, you might be found partially accountable for its downfall.

If unfit conduct or misfeasance is discovered, directors can face disqualification for up to 15 years, which prevents them from acting as directors of any company.

How Overdrawn Loan Accounts Affect Creditors During Liquidation

If significant amounts are tied up in DLAs, less money is available to distribute, affecting the company’s ability to settle its debts fully.

This can have a direct impact on the company’s creditors, including suppliers, lenders, and even employees who may be owed money. In a situation where funds are limited, the repayment of an overdrawn DLA can mean that unsecured creditors receive a smaller portion of what they are owed, or in some cases, nothing at all

What Can Directors Do about a DLA in Insolvency?

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.

1. 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.
2. 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.
3. 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.

Seek Professional Assistance

Navigating the complexities of an overdrawn director’s loan account and the potential liquidation of your company can be daunting. It’s crucial to seek the advice of a licensed insolvency practitioner as soon as possible.

Taking this step can significantly impact the decisions you make about your company’s future, ensuring they are informed and strategic. Contact us now on 08000 746 757 to learn how we can support you.

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