Contesting An Overdrawn Director’s Loan Account Claim Overview
Contesting an overdrawn director’s loan account claim CAN be straightforward but it depends. The Director can look at the two key issues: the amount claimed and therefore whether the accounting is accurate or alternatively whatever the sum claimed might be, whether they can afford to repay any or all of it. From those two positions often negotiations will resolve matters.
However, there is a potentially overarching issue to consider before descending into the devil detail and crunching through those numbers. Take a step back and consider strategically how an overdrawn director’s loan account can develop.
This is the element to litigation and matters of adversarial legal proceedings – the human dimension and attitude to risk.
What Is An Overdrawn Director’s Loan Account?
An overdrawn director’s loan account is simply a balance after accounting for the monies a director has incurred for the benefit of the company, offset against the monies the company has paid out to the director which he or she was not entitled to in respect of dividends or salaries.
It is therefore nothing more than a series of transactions between the director and the company. If the amount in question paid to the director that they were not entitled to exceed the amount the director has incurred for the benefit of the company, then the director will be overdrawn and owe the company a sum of money.
What Is An Overdrawn Director’s Loan Account Claim?
An overdrawn director’s loan account claim is commonly a demand put to a director by an Insolvency Practitioner such as a liquidator when a company goes into insolvent liquidation.
The duty or burden on the liquidator when making such a claim will require him or her to be able to show that payments have been made to the director from the company. That is a fundamental starting point without which an overdrawn director’s loan account cannot realistically get off the ground.
This is critical because the burden is on a director (a person with fiduciary director duties) to justify their receipt of this company money. This suggestion comes from the well known case Re Idessa (UK) Limited [2011] EWHC 804:
… once the liquidator proves the relevant payment has been made the evidential burden is on the Respondents to explain the transactions in question. Depending on the other evidence, it may be that the absence of a satisfactory explanation drives the Court to conclude that there was no proper justification for the payment. However, it seems to me to be a step too far for Mr Aslett to say that, absent such an explanation, in all cases the default position is liability for the Respondent directors. In some cases, despite the absence of any adequate explanation, it may be clear from the other evidence that the payment was one which was made in good faith and for proper company purposes.
What Is The Human Dimension To Litigation Risk?
Ulimitately an overdrawn director’s loan account claim can result in legal proceedings being brought against a director by the company, or the liquidator or an assignee of an overdrawn director’s loan account claim.
Litigation ideally gets resolved by the merits of the parties’ cases but the human element to litigation justifies careful consideration.
Whilst going to court to further contested legal proceedings is not a gamble considered to be consistent with that of winning or losing at the roulette table for example, it is indeed nevertheless an activity occasioned by risk. The party deciding the case (the judge) might not be satisfied with the evidence presented by the claimant. Decisions in the civil courts by judges are taken based on a concept of the balance of probabilities. That is potentially a nebulous concept. It is not really scientific.
It is quite conceivable that a claimant may wish to minimise their risk. That risk tends to go up the longer proceedings go on because the legal costs for all of the parties will typically increase. Furthermore, the more parties dig their heels in and contest matters, the greater the potential risk for all sides as well.
A director facing an overdrawn director’s loan account claim from say a liquidator has a risk. The risk is that they will be called upon to pay their overdrawn director’s loan account and if they contest matters through the courts they can find themselves having to pay the liquidator’s costs as well.
However, the flip side to this coin is that the liquidator in this hypothetical example also has a risk. Their risk is that of losing the case and having to pay the legal costs of the director. So from the position of a director who considers they have a defence to the claim, it can be relevant that they demonstrate to the liquidator the risk they face in taking the matter to court. The potential way to do that can be to evidence the material areas of dispute. Once a claim is disputed then except if it is done on spurious grounds, then the risk to the liquidator running the claim will often go up and may make them more amenable to negotiation.
