Can An Overdrawn Director’s Loan Account Be A Transaction At An Undervalue?

Can An Overdrawn Director’s Loan Account Be A Transaction At An Undervalue? It is perfectly possible for transactions that make up an overdrawn director’s loan account to be transactions at undervalue.

When a company provides loans to directors it is swapping the certainty of cash in its bank account for the uncertainty of the recovery of that cash at a later date.

In a great many cases although an overdrawn loan account is not illegal a company that provides loans to its directors is not necessarily advancing the future prosperity of the company in doing so but putting the company’s prosperity at risk by putting its cash at risk.

It is correct to say that consideration is provided by the director ie. the requirement to repay those loans but what if the director has no intention of repaying or has no ability to repay, then the advancement of the funds will leave a director with a potential uphill struggle to say that the equivalent money or monies worth was provided (Section 238(4)(b) of the Insolvency Act 1986).

It is not unknown to see overdrawn director’s loan accounts sitting in Other Debtors on the balance sheet with limited movement for years at a time. It is also not unknown for directors to accumulate overdrawn director’s loan accounts after hoovering up substantial funds from the company, that exceeds their unencumbered personal assets.