When an overdrawn Director’s Loan Account (DLA) is being pursued by a liquidator during a company liquidation, a director could face several personal risks encompassing tax liabilities, legal penalties and even severe financial consequences.

Chris Horner, insolvency director with BusinessRescueExpert explains: “The core issue here is that the DLA is viewed as an asset of the company. As such, the liquidator is duty-bound to recover this debt to maximize realisations for the creditors.  The director can be personally pursued for the full amount owed.”

Severe financial and asset risks

The most immediate personal risk for directors is the liquidator pursuing the debt through legal means that could jeopardise their financial stability and assets. Specifically:-

  • Pursuit and increased debt: The director with the DLA can be personally pursued for the full outstanding amount. This can include the potential for additional costs, fees and interest to be added, potentially resulting in the final bill being far more than the amount originally owed.
  • Loss of personal assets: If the director fails to repay the loan, the liquidator can pursue recovery actions that put personal finances and assets, potentially including the family home, as risk. Recovery methods can include:
  • Personal bankruptcy: If the debt is substantial and the director cannot afford to repay it then they could be at risk of personal bankruptcy – one of the most serious issues any director could face.

Legal consequences and director misconduct

During the insolvency process, a director’s conduct and the company’s financial management are investigated by the insolvency practitioner. If misconduct is found then there are a range of potential consequences including:

  • Director disqualification: Mismanagement or misuse of a DLA, particularly if funds were taken irresponsibly or when the company was insolvent, can lead to the director being disqualified or banned from acting as a company director for a period ranging from two to 15 years depending on the offence. Abuse of a DLA is grounds for disqualification claims. 
  • Personal liability for company debts: If the investigation finds that the director took money when the company was insolvent or that their actions contributed to the failure of the company then they can be made personally liable for company debts. This can also occur if wrongful trading or misfeasance is proven.
  • Repayment of illegal dividends: If the DLA was reduced or repaid by declaring dividends when insufficient profits were available then these would be viewed as illegal dividends. The director will be personally made to repay these sums from their own assets as well as facing possible legal consequences such as disqualification. 
  • Criminal charges: In the most serious cases where fraud or financial misconduct can be proven then there could be criminal charges, fines or even imprisonment to consider, depending on the severity. 
  • Loss of defence due to poor records: If directors failed to maintain accurate and up-to-date financial records then they may be unable to prove that payments taken were legitimate salary, expenses or loan repayments, forcing them to repay sums that might otherwise have been offset.

Tax liabilities and penalties

  • Income tax on debt write-offs: If the liquidator writes off the DLA in whole or part of it during the insolvency process, the director who benefited from the write-off must disclose this value on their individual Self-Assessment return as income without tax deduction at source. This could result in a significant personal tax bill. 
  • Penalties and interest: If the company did not account to HMRC for the Section 455 tax charge (on the overdrawn DLA balance) or if payments were late, additional penalties and interest may become due from the company, compounding its financial distress.
  • Personal Liability Notices (NIC): If a director attempted to convert the DLA into remuneration just before liquidation, they face an additional risk of HMRC pursuing them for a Personal Liability Notice that will cover the unpaid National Insurance component of the remuneration.

Directors Loan Accounts are useful sources of liquidity and can be essential to the running of a business but as with so much in business and life – financial difficulties and insolvency complicate everything. 

If you’re struggling to juggle repayments and other financial commitments or fear you will run into difficulties over the next few months then get in touch with us today. 

Our advisors will work with you through your feasible and realistic options and help you develop concrete plans based on your goals for you and your business.