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If your director's loan account (DLA) is overdrawn when your company goes into liquidation, the money you owe the company becomes a recoverable asset, and the liquidator will be expected to pursue repayment on behalf of creditors. This is one of the most common concerns directors raise when considering liquidation, and it is important to understand exactly what it means for you personally, what the liquidator's powers are, and what options are available if you cannot afford to repay.
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| Question | Answer |
| Is an overdrawn DLA written off in liquidation? | Overdrawn DLAs are not written off, instead it becomes a company asset that the liquidator must pursue |
| Who recovers the debt? | The appointed liquidator, on behalf of the company's creditors |
| Can the liquidator take legal action? | The liquidator can issue a statutory demand or court proceedings if necessary |
| What if I can't afford to repay? | You may be able to negotiate a repayment plan with the liquidator |
| Can preferential repayments be reversed? | Yes, repayments made within two years of liquidation may be challenged under s239 |
| Are there tax implications? | An S455 tax charge applies if not repaid within nine months of year-end. The rate is 33.75% for loans made before 6 April 2026, rising to 35.75% for loans made on or after that date |
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A director's loan account is a running record held in your company's books that tracks any money you take out of the business that is not classed as salary, dividends, or reimbursement of expenses. It also records any money you personally lend to the company.
When the account is in credit - meaning the company owes you money - this is straightforward. When the account is overdrawn - meaning you owe money to the company - this creates an obligation. Under normal circumstances, directors have until nine months and one day after the company's financial year-end to repay an overdrawn DLA before an S455 tax charge becomes due. In a financially healthy company, this is a routine matter.
The situation changes fundamentally if the company becomes insolvent, however, and enters liquidation. At that point, the overdrawn balance is no longer just an internal accounting matter; it becomes a debt owed to the company, and therefore an asset that belongs to creditors.
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When an insolvency practitioner is appointed, whether in a Creditors' Voluntary Liquidation (CVL) or compulsory liquidation, one of their primary duties is to identify and recover all assets owed to the company. An overdrawn director's loan account is treated in exactly the same way as any other debt owed to the business.
The appointed insolvency practitioner will review the company's books and records, identify the outstanding DLA balance, and write to you formally requiring repayment. They are acting on behalf of the company's creditors, and their duty is to maximise the funds available for distribution. This is not a choice made by the insolvency practitioner; they are legally obliged to pursue recovery.
Importantly, the DLA balance is not automatically written off. Even if the company has no other assets, even if you are the only director, and even if you initiated the liquidation yourself, the overdrawn balance remains your personal liability and the liquidator will seek to recover it.
The liquidator has a range of legal powers available to them when pursuing repayment of an overdrawn DLA. Understanding these helps you appreciate why early, open communication with your insolvency practitioner is always the better approach.
In practice, most liquidators prefer to reach a negotiated resolution rather than pursue costly legal action. If you engage promptly and honestly about your personal financial position, there is usually scope for a constructive conversation.
The Section 239 preference rule is an important and often overlooked issue when it comes to overdrawn directors loan accounts in liquidation. Under Section 239 of the Insolvency Act 1986, the liquidator has the power to challenge transactions made within two years before the onset of insolvency if those transactions were made in a way that put one creditor in a better position than others, particularly connected parties such as directors.
In the context of a director's loan account, this means that if you made repayments to bring your overdrawn DLA down, or cleared it entirely, in the two years before liquidation, the liquidator can potentially seek to reverse those repayments and recover the money as a preference. This is sometimes a surprise to directors who assumed that repaying their DLA before liquidation was the responsible thing to do.
The key test is whether you were influenced by a desire to put yourself in a better position than other creditors. For transactions with connected parties (including directors), there is a legal presumption that this was the case, meaning the burden falls on you to demonstrate otherwise. This makes it essential to take professional advice before making any DLA repayments if your company is already in financial difficulty.
This is the reality for many directors; the money was drawn from the company over a period of time, often to cover personal living costs during a difficult period for the business and repaying it in full is simply not possible.
If this is your situation, the most important thing you can do is engage openly with an insolvency practitioner from the outset. Attempting to avoid the issue, failing to respond to correspondence, or obscuring the true position will only make matters worse — it may be interpreted as a lack of cooperation, which can have implications for the director conduct investigation and subsequent report.
In practice, liquidators have several options when a director cannot repay in full:
The earlier you have this conversation, ideally before the liquidation begins rather than after, the more options are typically available. Your insolvency practitioner can help you understand your personal financial exposure and plan accordingly.
Yes. An overdrawn director's loan account can give rise to a tax charge under Section 455 of the Corporation Tax Act 2010 (commonly referred to as the S455 charge). If the DLA has not been repaid within nine months and one day of the company's accounting year-end, the company must pay a tax charge to HMRC on the outstanding balance.
The applicable rate depends on when the loan was taken out:
If your company is approaching liquidation and has an overdrawn DLA, it is worth understanding which rate applies to your balance, particularly if the loan straddles more than one period.
In a liquidation, the S455 charge will be included in the company's outstanding liabilities, and HMRC will rank as a creditor in the normal way. If the DLA is subsequently repaid, the S455 charge can be reclaimed, but only after a minimum of nine months following repayment, through HMRC's standard refund process.
The interaction between a DLA, S455 charges, and the liquidation process can be complex. It is worth discussing the full tax position with your insolvency practitioner before the liquidation commences.
We deal with overdrawn director's loan accounts as a routine part of the liquidation process and speak to directors in your position every day. Whether your DLA is modest or substantial, whether you can repay it or not, understanding your position clearly before the process begins gives you the best chance of managing the outcome.
All insolvency practitioners at UK Liquidators are fully licensed and regulated. We offer a free initial consultation with no obligation and operate from over 100 offices across the UK. Everything you tell us is strictly confidential.
Can an overdrawn director's loan account be written off before liquidation?
In some circumstances, yes, a director's loan account can be written off by the company, but this has tax consequences. Writing off the balance means it is treated as income in the director's hands, making it subject to Income Tax and National Insurance. In the context of an insolvent company approaching liquidation, writing off the DLA could also be challenged by the liquidator as a transaction at undervalue or a preference, particularly if done shortly before insolvency. You should always take professional advice before writing off a DLA.
Does an overdrawn DLA affect whether I can use a CVL?
No, an overdrawn director's loan account does not prevent you from using a Creditors' Voluntary Liquidation. It does, however, affect the process, because the liquidator will be required to pursue repayment as part of their duties. Knowing this in advance allows you and your insolvency practitioner to plan how to handle it. Many directors with overdrawn DLAs proceed through a CVL without significant personal consequences, provided they engage openly and honestly.
What happens if there are two directors and only one has an overdrawn DLA?
Each director's loan account is treated separately. The liquidator will pursue the director whose account is overdrawn for repayment of their specific balance. The other director's position is unaffected, provided their own account is not overdrawn and they have not been involved in any transactions that could be challenged. Each director's conduct will be investigated individually.
Can the liquidator access my personal bank accounts to recover the DLA?
Not automatically, but they can pursue you through the courts for repayment, which could ultimately result in enforcement action against your personal assets, including bank accounts, if a judgment is obtained and you fail to pay. This is why engaging with the liquidator and reaching a negotiated resolution is strongly preferable to ignoring the issue.
I owe money to my company but my company also owes me money — can these be offset?
This is a common situation. Where a director has both an overdrawn DLA and a separate loan they have made to the company, these balances can in some circumstances be set off against each other, meaning only the net balance is pursued. The rules around set-off in insolvency are specific and technical, and the liquidator will need to assess whether the conditions for set-off are met. This is something to raise with your insolvency practitioner at the outset.
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If you are considering liquidation for your company, taking expert advice at an early stage is crucial. At UK Liquidators, our team of licensed insolvency practitioners are committed to providing limited company directors with the help and advice they need to make an informed decision.
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