Clear Director Loan Account

Five Ways To Clear Directors Loan Account

Do you want to clear Director Loan Account? There are five ways clear a Director’s loan account that is overdrawn in most companies that are owner-managed businesses.

How To Clear A Director’s Loan Account Before Liquidation

Dividends To Clear The Director Loan Account

You can vote a dividend. The liability that arises will be a credit to the director’s loan account. Provided the dividend is larger than the overdrawn balance then it will clear the overdrawn director’s loan account.

However, because dividends have strict rules to protect creditors, it is important that you ensure they are not unlawful dividends. A key question that needs to be asked about unlawful dividends is whether or not the company has sufficient distributable reserves.

It is important that also when assessing the ability to declare a dividend the director has in mind that the company is not insolvent. If the company were to enter insolvent liquidation within 2 years of such a dividend, then it could be reclaimed by a liquidator as a Preference.

If the dividend is deemed unlawful or a preference, then it will have to be repaid.

Salary To Clear The Director Loan Account

In the same way as with dividends, you might be able to clear a director’s loan account by paying yourself extra salary as a bonus. However, this will be reported to HMRC under Real Time Information (“RTI”) that is provided to HMRC each month. PAYE and NIC will be payable on the salary, so the company should ensure that it has funds available to pay the tax.

The company should look to ensure that it is solvent and able to pay the tax. Otherwise, it is conceivable that a liquidator might later challenge the bonus payment as misfeasance and not in the best interests of the company.

Expenses Set-Off

If you have spent money on behalf of the company you can claim that provided you have retained evidence or can properly justify it. This could help you clear the Director loan account.

Many directors incur expenses on behalf of a company but forget to claim them if they are considered trivial. Over time these mount up. However, you are perfectly entitled to claim them provided you are not claiming for periods when the accounts have already been filed and submitted to HMRC. If you try to claim for expenses in earlier periods then you will have to submit amended accounts and corporation tax returns which will conceivably open you up to the prospect of a tax enquiry. There are however time limits on your being able to amend such returns.

Can A Director Write Off A Loan Account?

You can formally write off the balance due to the company. However, if you do this it will be treated as either dividends or salary depending on the structure of the company.

Repayment And Combinations

Lastly, you can simply repay the money to the company. However, there is nothing to stop you subject to the caveats combining dividends, salary, expense claims, some repayment and some write-off element to clear Director loan account.

Liquidation To Clear The Director Loan Account

In the event that you are not in a position to clear the Director loan account using one or more of the above options and wish to close your company and make a fresh start then you can use a procedure known as Creditors Voluntary Liquidation.

This is a formal insolvency procedure that involves the directors of a company bringing their business to an end. You can also obtain a quote for the cost of the same.

What Happens To An Overdrawn Director’s Loan Account In Liquidation?

In liquidation, an overdrawn director’s loan account is a matter that has to be addressed by the liquidator. It is an asset of the company which any liquidator has a duty to attempt to realise for the benefit of creditors.

It is commonplace for a director to owe money to their company when it goes into liquidation because they will have drawn money to live on in the period leading up to liquidation. However, as it will often have been inappropriate to declare dividends and the company may have been without sufficient funds to pay the tax on the drawings, the director’s position can become overdrawn due to payments made to themselves for which they can be liable.

Once the company goes into liquidation, then the director will no longer be able to put the ODLA off for a rainy day, as at some point the liquidator will come knocking to look to address the matter and if necessary, negotiate its repayment. Whatever is then repaid can be down to matters of whether the sum is in dispute and the director’s ability to pay.

Liquidation will not clear the Director loan account as such because it is still deemed to be an asset of the company. However, together with the Liquidator, you will be able to consider what can be repaid based on your means to resolve matters.

If however, you find yourself ever facing a claim from a Liquidator then defending an overdrawn Director’s loan account should be taken seriously and professional advice taken as soon as possible.

Our CEO, Elliot Green has wide experience of these issues. If you need advice on the same, then get in touch below.

Liquidate With A Director’s Loan Account