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.
Can I Close My Company with an Overdrawn Director’s Loan?
Yes, you can close your company with an overdrawn director’s loan, but the process and implications differ depending on whether your company is solvent or insolvent.
Closing a Solvent Company with an Overdrawn Director’s Loan
If your company is solvent (able to pay its debts), you have several options:
(1) Repay the loan: This is the simplest solution. You can repay the loan in cash or by transferring personal assets to the company.
(2) Declare a dividend: If the company has sufficient distributable reserves, you may be able to declare a dividend to offset the loan. However:
This dividend is added to your other income for the tax year.
If the total exceeds your current tax band threshold, part or all of the dividend may be taxed at a higher rate.
For example, if you’re a basic rate taxpayer (earning up to £50,270 in 2023/24), and the dividend pushes your total income above this threshold, the portion exceeding £50,270 would be taxed at the higher dividend rate of 33.75% instead of 8.75%.
(3) Write off the loan: The company can write off the loan, but:
This will be treated as a dividend for tax purposes.
You’ll need to pay income tax on the amount written off.
Closing an Insolvent Company with an Overdrawn Director’s Loan
If your company is insolvent (unable to pay its debts), the situation becomes more complex:
Creditors’ Voluntary Liquidation (CVL): In a CVL, the liquidator will treat the overdrawn loan as an asset of the company and will seek to recover it from you.
Compulsory Liquidation: If a creditor forces the company into liquidation, the official receiver or liquidator will investigate the loan and may take legal action to recover it.
In both cases, you remain personally liable for repaying the overdrawn amount. Failure to do so could result in legal action against you.
Remember, attempting to write off the loan or repay it just before insolvency could be seen as a preference and potentially be reversed by a liquidator. It’s crucial to seek professional advice before taking any action in this situation.
The Impact of Liquidation on Overdrawn Director’s Loans
When a company enters liquidation, the appointed liquidator has a duty to realise the company’s assets for the benefit of creditors. An overdrawn director’s loan is considered a company asset, and the liquidator will take steps to recover it:
Assessment: The liquidator will review the company’s financial records to determine the exact amount owed.
Demand for repayment: You’ll receive a formal demand to repay the outstanding loan.
Negotiation: The liquidator may be open to negotiating a repayment plan if you can’t repay the full amount immediately.
Legal action: If you’re unable or unwilling to repay, the liquidator may initiate legal proceedings against you.
Potential Consequences for the Director
As a director with an overdrawn loan account during liquidation, you could face significant personal and professional risks.
You remain personally responsible for repaying the loan, even after the company’s dissolution. The liquidator may take legal action against you, including pursuing County Court Judgments or statutory demands to recover the debt. If you’re unable to repay, you could face bankruptcy proceedings, potentially jeopardising your personal assets and financial stability.
In severe cases, you might face disqualification as a director for up to 15 years under the Company Directors Disqualification Act 1986[1]Trusted Source – GOV.UK – Company Directors Disqualification Act 1986, seriously impacting your future business prospects.
It’s crucial to cooperate fully with the liquidator and seek independent legal advice to protect your interests. Any attempts to conceal the loan or transfer company assets to avoid repayment could lead to accusations of misfeasance or fraud, with serious legal consequences.
Transparency and proactive engagement with the liquidation process are essential to mitigate these risks and navigate this challenging situation effectively.
Expert Advice
Closing a company with an overdrawn director’s loan account is a complex process that requires careful consideration and expert guidance. At Company Debt, we specialise in helping directors navigate these challenging situations.
Our team of insolvency practitioners and financial experts can:
Assess your company’s financial position
Advise on the most appropriate closure method for your circumstances
Guide you through the liquidation process if necessary
Help you understand and manage your personal liabilities
Assist with negotiations with creditors and HMRC
Don’t let the stress of an overdrawn director’s loan overwhelm you. Taking professional advice early can help protect your interests and ensure you comply with your legal obligations.
If you need help understanding the best way forward for your company, use the live chat during working hours, or call us on 0800 074 6757. We’ve helped 1000’s of directors navigate difficult financial circumstances.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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