Overview Of Options When Pursued By A Liquidator For An Overdrawn Director’s Loan Account
Are you concerned about being pursued by a Liquidator for an Overdrawn Director’s Loan Account?
When a company goes into insolvent Liquidation an Overdrawn Director’s Loan Account is very common. As an asset of the company, the Liquidator is obliged to recover it for the benefit of the creditors in seeking to maximise the realisations for the Liquidation.
So to be clear if indeed there is an Overdrawn Director’s Loan Account it is the Liquidator’s DUTY to look to recover it.
What Is An Overdrawn Director’s Loan Account?
An Overdrawn Director’s Loan Account is an amount of money owed by a Director to a company. If having had more money or monies worth than they are entitled out of the company the Director then has a liability to it.
The company on the other hand being owed the money records the Overdrawn Director’s Loan Account as an asset on its balance sheet.
An Overdrawn Director’s Loan Account is a unique asset because it is an asset that the business owners of most small or medium companies can control the point of repayment often without much pressure except for consideration of the tax implications of an Overdrawn Director’s Loan Account.
Effect Of Liquidation On An Overdrawn Director’s Loan Account
Whether a company is solvent or insolvent, the effect of Liquidation is the appointment of a Liquidator who must be a Licensed Insolvency Practitioner. This means that in view of Section 103 of the Insolvency Act 1986 the Directors lose their powers.
Therefore no longer can the Director(s) determine the point of repayment. That matter is now in the hands of the Liquidator.
The effect of Liquidation changes what was a unique asset, being the money owed by the Director to the company they controlled, to a matter completely outside of their control. That applies to all the assets of the company and the conduct of its affairs in Liquidation.
How An Overdrawn Director’s Loan Account Can Be Pursued By A Liquidator
The way an Overdrawn Director’s Loan Account can be pursued by a Liquidator could depend upon how it is discovered.
If the position on the Director’s Loan Account has already been declared by the Directors on the Statement of Affairs then this can make it much harder for a Director to raise a dispute afterwards. This is because the Statement of Affairs is supported by a statement of truth.
In such an instance the Liquidator can issue a Statutory Demand for payment of the outstanding Director’s loan balance.
In other cases, an Overdrawn Director’s Loan Account might be discovered by the Liquidator as a result of their investigation of Directors in a Liquidation after a Liquidation has commenced. Unless the position is then admitted it represents a claim by the Liquidator which might be disputed by the Director(s).
What Are The Options Of The Director When Pursued For An Overdrawn Director’s Loan Account?
A Director who is pursued by a Liquidator for an Overdrawn Director’s Loan Account in a nutshell has the following options:
- Pay the amount claimed by the Liquidator.
- Dispute the amount claimed by the Liquidator and negotiate the figure.
- Inform the Liquidator they cannot repay the loan account and negotiate the figure.
- Grant security for the debt over the family home to provide a breathing space whilst seeking to obtain alternative finance to settle the matter.
- Consider personal insolvency proceedings such as an Individual Voluntary Arrangement or Bankruptcy.
Negotiating With The Liquidator Over The Loan Account
Negotiating with the Liquidator over the loan account will often boil down to whether or not the claimed sum is disputed and also a Director’s ability to pay.
A disputed Overdrawn Director’s Loan Account will generally be more costly for a Liquidator to pursue because the amount of the claim will need to be determined. This can potentially lead to an expensive litigation trial to finalise the figure that is owed by the Director (if any).
As a matter of general negotiation often money today is more valuable compared to the prospect of more money at a later date with the associated uncertainties of that. This can therefore provide options and opportunities for the Director to negotiate with the Liquidator pursuing the Overdrawn Director’s Loan Account.
What Can Happen To The Family Home?
In many cases, if the Overdrawn balance is a lot of money the Director may be unable to repay it without either having to extract equity from their home or perhaps even selling it to settle the debt.
A Director can be faced with a stark choice between selling the home sooner rather than later instead of incurring costs embroiled in a legal dispute which can rapidly escalate or running the risk of personal Bankruptcy.
Personal bankruptcy will often not lead to very rapid repossession of the family home given the one year grace period typically afforded to a Bankrupt’s family in light of Section 336 of the Insolvency Act 1986. This can have the effect of delaying a Liquidator’s recovery of the Director’s Loan Account and may provide some negotiation opportunities for the Director.
If there is limited equity in the family home then this may improve the negotiating position of the Director. This is because a debt that has to be pursued through the Courts can be expensive for the Liquidator who will usually incur substantial legal costs that might not be recoverable. Furthermore, if the equity is limited then a Court may be less enthusiastic about ordering the family home to be repossessed by a Liquidator even if he or she has successfully obtained judgment on the matter of the debt due to be paid.
