Is An Overdrawn Director's Loan Account Illegal?

Is An Overdrawn Director’s Loan Account Illegal Overview

The answer to the question Is An Overdrawn Director’s Loan Account Illegal? is generally no, it would not be unlawful.

However, a company cannot provide a loan to a Director without consideration of the shareholders if the amount is more than £10,000.

What Is An Overdrawn Director’s Loan Account?

An Overdrawn Director’s Loan Account is the net balance of monies that a Director owes to a company after accounting for the monies they may have lent to the company and monies they are entitled to have received from the company.

Monies A Director Has Received

Monies a Director may have received from a company could take the form of loans or payments that a company has made on behalf of a Director in respect of personal expenses.

Monies A Director Is Entitled To Receive

Monies a Director is entitled to receive from a company will usually take the form of the following:

• Salary or wages.
• Dividends if they are also a shareholder.
• Monies they have lent to the company.
• Expenses they have paid on behalf of the company from their personal funds.

Can An Overdrawn Director’s Loan Account Be Illegal?

An Overdrawn Director’s Loan Account is generally not illegal, at least in the criminal sense.

However, if a Director has taken a loan from a company without shareholder approval, which exceeds by more than £10,000 the amount the company owes to them then this would be unlawful.

Section 197 of the Companies Act 2006 (“Section 197”) does not permit without shareholder approval a company making a loan to a Director. But Section 207(1) of the Companies Act 2006 does permit this as an exception if the sum does not exceed £10,000.

The consequence of an Overdrawn Director’s Loan Account taken without valid approval is set out in Section 213 of the Companies Act 2006. The loan has to be repaid.

Disclosure Of An Overdrawn Director’s Loan Account

When a company has an overdrawn Director’s loan account this must be disclosed in its accounts and to HMRC in the Corporation Tax return by way of a supplemental sheet CT600A.

In the accounts, in light of Section 413 of the Companies Act 2006 the overdrawn Director’s loan account must be disclosed in the notes showing the amount advanced, any amounts repaid, written off or waived and details of any interest charged.

Disclosure to HMRC is in the Corporation Tax return supplemental sheet CT600A setting out details of the loan arrangements.