Can’t afford to repay company’s Overdrawn Director’s Loan Account

Can’t pay off Overdrawn Director’s Loan Account (ODLA)

What is an Overdrawn Director’s Loan Account?

A Director’s Loan Account records how much money the director borrows from the company, separate from salary, dividends or expenses. If a Director’s Loan Account is overdrawn, the director owes more money than they have put into the company.

When a company director borrows money from the company, the loan is subject to tax, and interest will incur if the loan exceeds a specified amount during the given accounting period. This must be considered when taking out a loan from the company.

While a Director’s Loan Account is perfectly acceptable, the director must be able to repay the loan within nine months of the company’s year-end. If the director cannot pay an Overdrawn Director’s Loan and the debt is called as the company enters liquidation, what are your options?

Do I have to repay an Overdrawn Director’s Loan during insolvency?

If a company becomes insolvent and enters insolvency proceedings, such as company liquidation, the Overdrawn Director’s Loan Account must be settled. The company director must also consider additional liabilities attached to the loan, such as tax and interest.

The Director’s Loan Account must be settled promptly so the funds can be used to repay creditors in priority order, a key part of the company liquidation process. If the Director’s Loan Account is significantly overdrawn, the liquidator will typically pursue the debt. If the ODLA has been written off, the liquidator has the power to reverse this decision and the Overdrawn Director’s Loan Account may be investigated.

If the director cannot afford to settle the Overdrawn Director’s Loan Account, what happens?

Can’t afford to pay off an Overdrawn Director’s Loan

A director’s loan is a popular way to borrow money for company directors due to its ease of access, speed, and repayment flexibility. If a company becomes insolvent, the director’s loan may become immediately payable, often with little to no notice. While a company director may have planned to pay off the loan at a later date, insolvency proceedings would trigger an earlier repayment deadline if the sum owed is substantial.

If you cannot afford to pay off an Overdrawn Director’s Loan Account, what happens?

• Any late ODLA payments may incur a penalty and additional tax liabilities
• The Overdrawn Director’s Loan Account must be settled, regardless of the director’s personal circumstances. If your personal finances are in decline, this could worsen your personal financial position or put you at risk of personal bankruptcy
• If misconduct is found, you could be disqualified as a company director which could have long-term implications. If you engaged in illegal activity, this could lead to prosecution
• If you fail to pay the debt to the company and have the funds, the liquidator may resort to launching court action

How we can help

A liquidator must collect outstanding debts and repay creditors as part of the liquidation process, including any Overdrawn Director’s Loan Accounts. Insolvency proceedings will essentially increase the urgency of repaying a director’s loan. If you are unsure of how to settle an ODLA, seek professional insolvency advice at the earliest opportunity to understand your repayment options.