Updated: 12th February 2021
Overdrawn directors’ loan accounts can come to be a real cause for concern; particularly in the context of a company entering insolvency.
Therefore it can help to understand as clearly as possible the nature of these financial facilities, how they work and why they can cause problems for directors and their creditors under certain circumstances.
Below is our closer look at the subject but if you have any more in-depth queries about overdrawn directors’ loan accounts then call you nearest Begbies Traynor office to arrange a free director consultation.
A director’s loan account is essentially a means through which a director removes money from their company in a way which isn’t related to dividends or payroll processes. Where no money is removed from a company, a director’s loan account can be considered as being at a zero level. The account will effectively be in credit where a director puts their own money into a company to cover expenses or costs relating to the purchase of specific assets.
Director’s loan accounts are generally a subject of scrutiny for a variety of relevant parties because they differ significantly from the processes involved in loaning money from business accounts in the context of sole trading or self-employed business operations. This is particularly the case when an account becomes overdrawn to a significant degree and when a relevant company finds itself facing financial distress of any kind.
An overdrawn director’s loan account describes a situation in which a director has taken more money out of a company than they have put in, not including dividends or salaries. These overdrawn amounts are counted as assets on the balance sheets of the companies involved until they are repaid.
Being overdrawn in this sense isn’t necessarily a problem for a company or a cause for concern for directors, as long as records are kept of all relevant transfers and amounts owed are settled within nine months of the company’s financial year end.
However, where these amounts are not repaid and the sums involved are in excess of £10,000, HMRC may take the view that a director has effectively been taking money out of their company as income, and they may therefore look to levy taxes on that basis.
In the context of a company entering insolvency, liquidators appointed to settle whatever debts they can on behalf of a business in distress will view an overdrawn director’s loan account as an asset to be pursued. So a director who has taken money out of their company in a manner other than through dividends or loans will then be liable to pay back those amounts to satisfy the company’s creditors. This, of course, can put pressure on the personal finances of directors whose business is being liquidated.
Making use of a director loan account is a common practice and not a problem if relevant records are kept and a director can pay back the amounts involved when necessary. In practice, however, loan accounts are often underestimated as a potential source of financial difficulties.
What often happens is that a director will take money out of his or her company when the business is progressing well but then struggle to pay back these amounts when trading takes a turn for the worse. This scenario is so common in fact that between 75% and 80% of business insolvency cases involve overdrawn director loan accounts.
A company may decide to write off a debt owed by a director as an overdrawn loan amount. However, this is not necessarily the end of the story, at least in a situation whereby liquidators have been appointed to raise as much money as possible from a business entering insolvency. Under these circumstances, the liquidator would be likely to pursue the director involved for the amounts owed regardless of whether or not his or her company had previously written off the debt.
Liquidators have a legal duty to pursue every possible avenue that may lead to creditors being satisfied in full or in part in the context of a company being rendered insolvent and having its assets liquidated. Unfortunately for individual directors, this can lead to them being pursued for debts they owe due to overdrawn director loan accounts and, where these debts cannot be paid, the individuals can find their company’s insolvency leading directly to their own personal bankruptcy.
There are situations in which a liquidator will deem the amounts owed by directors to a company to be relatively insignificant and not worth pursuing. This though will depend on the amounts involved.
There is scope for amounts owed through overdrawn director loan accounts to be reduced at any point where claims can reasonably be made that the monies involved were transferred to cover expenses relating directly to a director’s business operations.
It is also a common feature of insolvency proceedings for directors to settle any amounts owed through overdrawn loan accounts in order to raise funds for creditors. Where this is not possible though then there can be other issues to address.
The issue of overdrawn director loan accounts, particularly in the context of a company becoming insolvent can be complicated by a variety of factors, not the least of which can be the potential tax implications. Therefore, whatever your circumstances or concerns may be, it is crucial to get the best possible advice and guidance on the key issues in a timely manner.
The sooner you call Begbies Traynor, the sooner we can help you establish exactly what your options are with regard to an overdrawn director’s loan account. You can call us today to arrange a free and completely confidential consultation.