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

The position with your director’s loan account can be the biggest point of conflict for a director when considering whether or not to place a company into liquidation. As a director you can unfortunately find yourself in a financial worse position, whether your directors loan account is in credit or overdrawn, however in the background creditors are putting pressure on your company and matters could be getting worse. Our first piece of advice, to quote both Lance Corporal Jones and Douglas Adams, is “Don’t Panic” we are here to help.

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How will the liquidator review a directors loan account?

To establish a starting position, a liquidator will refer to the last set of accounts prepared for the company. These will have been signed off by the board so effectively provide an accepted starting position for director’s loan accounts. From here the liquidator will look at all the the transactions between the last accounts and the date of liquidation and record any appropriate movements against the loan account. These transactions will include:

  • All payments to and from the director.
  • Cash withdrawals not accounted for by the cash book.
  • Payments which do not appear to be for the benefit of the company.

Following this you will be provided with a copy of this account, asking for you to provide comment on its content. It will be at this time other transactions can be added to the loan account which will bring a final position between you and the company:

  • Credit for payments declared properly as salary through the PAYE scheme.
  • Credit for any lawfully declared dividends.
  • Credit for any personal spending, directly for the benefit of the company, including properly incurred expenses and payments from your personal accounts to company creditors.

Our best advice is to keep the company accounting records up to date with all of these transactions. Whilst a liquidator will need to review the period against the company books and records, this will streamline the process for agreeing the current position of your director’s loan account. If, after all of the transactions between the director and the company have been properly considered, the director’s loan account suggests you owe money to the company, (being overdrawn) the liquidator will engage with you to discuss repayment of the balance.

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. It is not advisable to repay yourself these monies, ahead of liquidation, to mitigate your own losses, as you could find yourself liable for making preference payments, resulting in costs and interest also being payable.

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

A liquidator has a statutory duty to recover funds in the best interest of creditors. Effectively, this means the full balance is due and payable, however the liquidator must make commercial decisions in how these funds are recovered. If you have assets such as property and investments, which would cover the overdrawn loan account, then the full amount will likely need to be repaid. The best thing a director can do in these circumstances is to make a repayment plan with the liquidator. A good insolvency practitioner, such as our business rescue experts, will not reject reasonable payment proposals to cover the balance, in favour of wasting costs and generating additional fees for themselves by taking unnecessary legal action to enforce against your assets.

If however you do not have sufficient assets to make repayment of the balance in full, the best thing you can do is reach a commercial settlement agreement with the liquidator as soon as possible. This will require you to complete a sworn statement of means, detailing your full financial position. The worst thing you can do is drag the process out and force the liquidator to take legal action against you to recover funds. This can make accepting a settlement at a later date more difficult if significant costs have already been incurred in pursuing the balance. Any court order against you would also result in a liability for costs and interest on top of the overdrawn loan balance.

Should I keep trading for the benefit of my loan account?

If it has been determined that your limited company is insolvent, with no prospect of returning to solvency, you should cease trading immediately. Whilst it may be tempting to repay any balances due to you from the company, before liquidating the company, this will generally result in a personal liability, as you have made a decision to put yourself in a better position than the rest of the creditors.

Likewise you should avoid trying to trade through to try and reduce your loan account liability as salary or dividends as this can expose you to even further personal liabilities for payment of unlawful dividends. If the company makes additional losses in this time, putting creditors in an even worse position, you can not only find yourself liable for the overdrawn loan account but also personally liable for these additional losses as a result of wrongful trading.

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. Again to ensure you do not make your position any worse, our insolvency practitioners are available to provide initial independent advice, without charge, and suggest the next steps available to you.

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 peace of mind, and lessens our workload!

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.

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