What happens to my overdrawn director’s loan account in liquidation?

If you withdraw money from your company and it isn’t related to your salary, dividends, or repayment of expenses, the money must be accounted for through your director’s loan account (DLA).

This is an account held within your company’s books, which records each withdrawal and repayment. Specific rules exist for repaying money owed to a company by a director, and if the DLA is still overdrawn when the business enters liquidation it can have serious ramifications.

UK Liquidators are liquidation specialists and can provide the reliable advice you need if your company is entering liquidation.

What exactly is an overdrawn DLA?

What is an overdrawn director’s loan account?

When your director’s loan account goes overdrawn, it means you officially owe money to the company. If the business is struggling to stay afloat financially, and ultimately has to enter liquidation, the money owed becomes an asset to be recovered.

The liquidator works on behalf of the company’s creditors and must recover money through the sale of assets and pursuit of any funds owed to the business. This provides a higher return for unsecured creditors, who typically receive very little from a liquidation process.

What are the implications of running an overdrawn DLA?

If you run an overdrawn director’s loan account in liquidation, the appointed liquidator will require that the company is repaid. They’ll pursue you through the courts if necessary, which in the worst-case scenario, introduces the possibility of bankruptcy.

You could also face scrutiny by the Insolvency Service - whenever a company enters liquidation, an investigation commences to uncover the reasons for the company’s decline. If one of those reasons is an overdrawn DLA, you could be held partly responsible for the company’s financial situation.

Your overdrawn DLA in liquidation

The rules around overdrawn DLAs dictate they must be repaid within nine months and one day of the company’s financial year-end. If more than £10,000 is owed back to the company and isn’t repaid in this timescale, you might have to pay income tax on the outstanding sum, as HMRC could regard the withdrawal as income.

When you take money out of the company and your director’s loan account becomes overdrawn, you may assume that you’ll be able to pay it back. Your company could experience a period of lower sales, however, leaving you unable to take your usual salary and bring the DLA back into line.

Unable to write off the debt

When the company enters liquidation you might assume that the debt you owe to your company can be written off. This isn’t the case, however, and the liquidator will take all steps necessary to recover the money.

This is why it’s so important to be fully aware of the balance on your director’s loan account, and to take the correct action if it becomes overdrawn. Understanding your responsibilities in this respect can safeguard you from personal liability should the company decline to the point of liquidation.

Seek professional assistance

If you believe your company may need to be liquidated and you have an overdrawn DLA, it’s important to seek the help of a licensed professional as soon as possible. You’ll find out about your responsibilities, and the potential ramifications if you can’t repay.

UK Liquidators are insolvency and liquidation specialists, and can provide further guidance on overdrawn directors’ loan accounts in cases of liquidation. Please call our partner-led team to arrange a free, same-day consultation. We work from a network of nationwide offices, and can quickly present your best options.