What happens to a director’s loan account within liquidation?

When your company goes into liquidation, as liquidators, we will sell any assets and collect any money owed to the company to pay for the liquidation and to pay the company’s creditors.  This includes any money owed from an overdrawn director’s loan account.  Here we discuss what this could mean for you in practice and how we would look to recover any monies owing from an overdrawn director’s loan account.


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How will the liquidator recover an overdrawn loan account?

If we liquidate your company, we’ll look at your company’s accounts, books and records to see if any parties owe the company money.  We’ll ask for information from your company’s accountant to work out if any customers owe the company money, for example, and also whether you, or any of the directors owe the company money.

If it looks like you have an overdrawn director’s loan account, firstly we’ll talk to you to confirm that the money is owed. We sometimes find that the records don’t show all the money that a director has put in, or costs that they’ve paid for personally.  If you can prove this is the case, then the amount owed may be less than we first thought, or possibly not owing at all.

If however there is money owing, you will be asked to repay it, in the same way that anyone else who owes the company will be.  Once the money is repaid, this is likely to be the end of the matter.

On the other hand, if your director’s account is in credit (if you are owed money by the company), you’ll be treated just like any other creditor.  If recoveries are made and there is a dividend to be paid out, you will receive a pro-rata payment along with the other creditors.

Overdrawn director’s loan accounts: does the full account need to be repaid?

If you owe the company money and you are willing to pay the money back, but can’t afford to, and can prove this, in some cases we will be prepared to settle for a lower amount to be repaid.  This will depend entirely on the circumstances of the case, however and whether it is in the best interests of the creditors.

For example, we would often be willing to give a discount on the total amount repayable if it can be agreed and repaid quickly.  Conversely, paying it back over a protracted amount of time is likely to mean repayment in full and if a court order was required, court costs and interest may also apply.

What powers do liquidators have to recover director’s loan accounts?

Under the Insolvency Act, as liquidators we are able to reverse transactions made by your company if they are not in the interest of all the creditors, or if they are to the detriment of the company.

For example, if a loan was repaid back to you as director before entering liquidation, we would need to have this overturned and demand that the money be paid back to the company to be made available for all the creditors.

Similarly, any director’s loans which were written off before liquidation would need to be repaid to the company.

If, as director, you were unable, or wouldn’t repay any money owed to the company, it may be reason for the Insolvency Service to seek to disqualify you from acting as a director in the future. This could be from anywhere between 2 to 15 years.

Just having an overdrawn loan account however, is certainly no reason for disqualification itself. This would depend on the director’s actions and if those actions were to the detriment of creditors.  Find out more about director’s investigations and director’s disqualifications.

How do we deal with an overdrawn director’s loan account?

Our advice is to be upfront about any overdrawn loan accounts.  If you can provide us with the information prior to your company being placed into liquidation, we can negotiate an acceptable repayment plan which leaves you knowing where you stand before liquidation.

Although the same can be done after liquidation, we find that clear communication and negotiation prior to formal insolvency allows you piece of mind, and lessens our work load!

Our view is that often the best way to recover funds for the creditors is to work with the directors to resolve matters quickly and amicably.

Have we answered all of your questions?  If you would like to talk to one of our business rescue experts directly, get in touch.