Does Liquidation Write Off An Overdrawn Director’s Loan Account?

Overview Of Does Liquidation Write Off An Overdrawn Director’s Loan Account

Does Liquidation write off an Overdrawn Director’s Loan Account? No, Liquidation crystalises an Overdrawn Director’s Loan Account.

What Is An Overdrawn Director’s Loan Account?

An Overdrawn Director’s Loan Account is simply a balance between a company and its Director. Whether the Director is owed money by the company (in credit) or is owing money to the company (overdrawn) depends on the transactions between the company and its Director. 

Many things can influence the make up of a Director’s Loan Account: Director’s salary, bonus, dividends, expenses and loans. Throw all such transactions into the accounting pot, give it stir and there you have it. The balance at a given point in time. 

Characteristics Of An Overdrawn Director’s Loan Account

A Director’s Loan Account sits on the company balance sheet as an asset. 

It is just like any other asset in the accounts. It has a value. That value is unaffected by depreciation. It is however affected by inflation. 

As assets go, it is very real as with physical assets and customer book debts. The fact it is owed by a Director does not make it any less of an asset than any other sum owed to the company such as by its customers. 

It does not disappear or evaporate simply because a company goes into insolvent Liquidation. It is not a flexible asset that a Director can pick and choose to repay whether in Liquidation or otherwise.

A Director’s Loan Account needs to be calculated at the end of each financial year to see if it has gone overdrawn. If it has gone into an overdrawn position and if the Director does not repay it within nine months and one day of the year end then HMRC will have its hand out for what is known as Section 455 Corporation Tax. 

The rate after April 2022 is 33.75% of the overdrawn balance. If the Overdrawn Director’s Loan Account is repaid then the Section 455 tax will be repaid by HMRC at the next tax filing point.

Effect Of Liquidation On An Overdrawn Director’s Loan Account

Liquidator duties mean the Liquidator must realise the company’s assets. That includes an Overdrawn Director’s Loan Account. 

A Director can therefore not anticipate a Liquidator should or could avoid addressing the issue, unwelcome as it might be for both parties.

If the Director cannot repay it then the Liquidator is likely to have the discretion subject to the provision of satisfactory evidence as to a Director’s means, to write off the Overdrawn Director’s Loan Account.

The key effect of Liquidation on an Overdrawn Director’s Loan Account is that it tends to bring the matter to a head. It is not unknown for an Overdrawn Director’s Loan Account to persist on a company balance sheet for years at a time. So long as the company has paid the Section 455 tax and the Director pays interest on the loan, then it can float along as an asset of the company for many years untroubled. However, once the company goes into insolvent Liquidation the matter materially transforms. 

Unlike a Director of a trading company, a Liquidator does not usually stay in office for decades at a time. A couple of years or less might be the norm and during that time the Liquidator will hope to realise all of the company’s assets.

Writing It Off And Liquidation

If the company is insolvent then the opportunity for a Director to write off an Overdrawn Director’s Loan Account is not necessarily lost but without the approval of creditors and or a Liquidator, such a writing off exercise can conceivably be set aside as a transaction at undervalue or a breach of duty. 

Directors envisaging that writing off an Overdrawn Director’s Loan Account might relieve them of the burden to repay it may need to carefully consider the implications of Section 415 Income Tax (Trading and Other Income) Act 2005. This means they will personally be subject to income tax on the written off element.

For a Director, insolvent Liquidation often represents the point at which they are likely to have to face the music with an Overdrawn Director’s Loan Account once and for all.