Cannot Pay Director’s Loan Account In 2022 And Getting Stressed?

This guide is for anyone with a company either in or going into Liquidation when you cannot pay an overdrawn Director’s loan account.

In this article you’ll learn about:

  • What to do about an overdrawn Director’s loan account in insolvency.
  • Issues for a Director to consider when negotiating with a Liquidator.
  • How you can negotiate a Director’s loan account with a Liquidator.
  • Negotiating with a Liquidator in good faith.

Let’s get cracking.

Cannot Pay Director's Loan Account

Cannot Pay Director’s Loan Account Overview

Directors negotiate with Liquidators over many different things and we will look into some of the typical issues that a Director of a Limited company will negotiate with a Liquidator about.

We’ll also look at a few real life examples from public sources and see in black and white what really happened. How did these Directors negotiate with an Insolvency Practitioner? Let’s find out.

Highlights On Cannot Pay Overdrawn Director’s Loan Account

  • How to negotiate with a Liquidator.
  • Negotiating Director overdrawn loan account.
  • Use of a Statement of Means to avoid potential legal action.
  • Bonus: Negotiating Liquidator claims against Directors.

What Is An Overdrawn Director’s Loan Account?

An overdrawn Director’s loan account is the position that arises when the monies taken out of a company by a Director and paid back or on behalf of the company are worked out. This creates the ‘account’ or in accounting terminology, it is called the ledger. When you fish out the calculator or fill the numbers into a spreadsheet and they are added up and subtracted you end up with a balance.

That is the balance on the Director’s loan account.

cannot pay overdrawn Director's loan account

Either the Director’s loan account is in ‘credit’ which means that the company owes the Director money. Alternatively, it is in ‘debit’ or more commonly referred to as being overdrawn in which case the Director owes money to the company. This article concentrates on the second situation when a company Director cannot pay their overdrawn Director’s loan account.

A Director’s loan account that is overdrawn is an asset of the company. It is essentially no different from being overdrawn with the bank. The difference is instead of owing the bank, you owe the company.

Liquidator’s Investigations Of A Director’s Loan Account

A Liquidator has a duty to investigate the conduct of Directors and therefore their loan account with the Limited company. That duty arises from both regulation and legislation.

It is very common for a Liquidator to investigate transactions involving Directors, particularly in the build up to Liquidation. Such transactions may well give rise to an overdrawn Director’s loan account that cannot be paid back by a Director.

liquidator duty to investigate when director cannot pay director's loan account

Liquidator Duty In Legislation

A Liquidator has a duty to get in, realise and distribute the assets of a company in Liquidation. They have a duty to assist the Insolvency Service to investigate Director misconduct through the Director Conduct Reporting Service. In order to get in the assets, a Liquidator needs to identify them. One way that a company’s assets are discovered is that a Liquidator is informed about them by the company’s Directors. Indeed the Directors have a duty to the Liquidator to inform him or her about all of the assets available. However, what happens when a Director does not tell the Liquidator about all of the assets?

Well, that is why there is a duty on a Liquidator to investigate.

Liquidator Duty In Regulations

There are also regulations that require a Liquidator to investigate such as in Statement of Insolvency Practice Number 2 which says as follows:

In every case, an office holder should make an initial assessment as to whether there could be any matters that might lead to recoveries for the estate and what further investigations may be appropriate.

Duty To Realise An Overdrawn Director’s Loan Account

Once a Liquidator’s investigations have discovered a Director’s loan account is overdrawn they have to request it is paid back given it is an asset of the Company.

If the overdrawn loan account cannot be repaid then you will need to negotiate with the Liquidator.

Can You Negotiate With A Liquidator?

Let’s be absolutely crystal clear. You CAN negotiate with a Liquidator or an Insolvency Practitioner if you cannot pay an overdrawn Director’s loan account. 

Can A Liquidator Negotiate?

Yes, a Liquidator can negotiate but not in an unrestricted way.

Negotiating with a Liquidator is not a straightforward matter. A Liquidator who is negotiating with a Director has to tread carefully. The Liquidator has a duty to be fair and reasonable and an Insolvency Practitioner has a duty to maximise realisations for creditors.

liquidation negotiating boundaries

You can negotiate with Insolvency Practitioners because when it comes to commercial decisions a Liquidator has wide discretion. Indeed the Court will not readily step in to control a Liquidator except if their actions are considered to be very unreasonable.

How To Negotiate With A Liquidator

If you cannot pay an overdrawn Director’s loan account then we appreciate that this can be very worrying. You could end up in Bankruptcy and lose your family home.

Your ability to negotiate with a Liquidator could be so important to you and your family.

The starting point in a negotiation with a Liquidator is your ability to pay because:

you cannot get blood out of a stone when you statement of means for when you Cannot Pay Director's Loan Account

If you do not pay the overdrawn Director’s loan account for any reason then the Liquidator has to take action to attempt to recover it. The Liquidator has to be able to justify any action (or inaction) that he or she takes. If you simply cannot pay it, either now or in the future the Liquidator can still pursue you for it but to do so would be pointless and expensive for the Liquidator, both in terms of time and cost.

It is also worth bearing in mind there is a risk with any legal proceedings and as a result, there is always the potential for the parties to negotiate an end to them once they have been issued.

Liquidator Pursuit Of A Director’s Loan Account

For a Liquidator to pursue an overdrawn Director’s loan account that is not repaid, they will usually need to instruct solicitors who will typically look to issue a Statutory Demand for payment.

Alternatively, the Liquidator’s solicitors may issue legal proceedings with a view to obtaining Judgment.

Both approaches will mean the Liquidator is incurring legal costs to take the matter forward. If the company in Liquidation is without any available assets to fund such proceedings then the Liquidator may have to consider funding them out of their own pocket or perhaps through a funding arrangement with their lawyers.

This means that an Insolvency Practitioner will usually want to be sure a Director has the ability to pay before embarking upon litigation.

Statement Of Means

Simply informing a Liquidator you do not have the ability to repay your overdrawn loan account back might not be sufficient. However, one way you could consider satisfying the Liquidator that you cannot pay an overdrawn Director’s loan account is to provide what is called a Statement of Means.

statement of means to show you cannot pay overdrawn Director's loan account

What Is A Statement Of Means

A Statement of Means is a document that details a person’s assets, liabilities, income and expenditure. It can be supported by documents to back up the major figures disclosed.

This shows you have nothing to hide. It helps the Liquidator demonstrate why you either have not been pursued at all or for less than the full amount  due on your director’s loan balance.

It is a useful document to show the state of someone’s finances as a whole. Even if someone appears to have assets, a lack of income to refinance those assets can have a material impact on negotiations with a Liquidator over a Director’s loan account balance.

It is important when you negotiate with a Liquidator you do so in good faith based on a true and fair representation of your financial position. If you do not provide the true position then in some cases a settlement negotiated could be reversed. There is as we shall see from the real-life Case Study 3 below a duty on a Director to help a Liquidator maximise realisations.

Later on, in this article are a couple of other real-life examples that focus on overdrawn Director’s loan accounts negotiated with the Insolvency Practitioners. You will see in both cases extracted from public records substantial reductions were negotiated compared with the amount outstanding on the loan account.

Costs Of Litigation

If you are unable to pay the full amount of your Director’s loan account but you can pay something then you may be able to negotiate a reduction based on the anticipated legal costs the Liquidator is likely to need to pay.

Such costs could be substantial. Indeed whilst there are no hard and fast rules about this many Liquidators will not consider it commercially viable to issue legal proceedings over an overdrawn Director’s loan balance of less than £10,000. A claim of that size may well be allocated to the small claims court where legal costs cannot usually be recovered thereby potentially acting as a disincentive to issue legal proceedings.

Family Home

If your overdrawn balance is substantial but the only way to repay is through the sale of your family home then the Liquidator may additionally need to issue extra proceedings to force the sale. This would lead to further legal costs which may enhance your negotiating position for a further reduction in the sum you should repay.

In addition, in the case of a family home, an Insolvency Practitioner typically will have to take into account the Director’s partner who may have a 50% interest in the property. This could greatly reduce the available equity to pay off a Director’s loan account and thereby help you to negotiate the repayable balance down.

Disputed Balance Of Director’s Loan Account

If you dispute the amount the Liquidator has claimed to be due under your Director’s loan account then if you put your case forward with the evidence, you may be able to negotiate a significant reduction in the sum that you have to pay. Indeed you might not even be overdrawn at all. However, it is conceivable such an approach may require you to instruct professional advisers to help you and this may be costly. This will be particularly the case if you have not properly kept records a company must keep.

Real Life Examples

The following are four real-life examples as follows:

  1. The first example is that of a Director who negotiated a substantial reduction to the payment required to settle their overdrawn balance.
  2. The second example is a case where an overdrawn loan account was sold for a substantial reduction to a litigation funder.
  3. The third case is of an overdrawn Directors loan where a third party stepped in to make an offer to the Liquidator.
  4. The fourth case has been picked to show the importance of negotiating in good faith and not misleading a Liquidator.

Case 1: Insolvency Practitioner Settles Director Loan Account Balance With Director

This was a case in which a company 1 went into Administration. At the date of the start of the Administration, the Director’s loan account was overdrawn in the sum of £562,376.

Yet the Director was able to negotiate a reduction of 99% to £6,000 with the subsequently appointed Liquidators.

overdrawn loan account negotiated down

Why Was A Settlement Of 1% Of The Loan Account Balance Agreed?

What reasons were given that explained why the Administrators accepted a settlement of 1% of the Director’s loan account balance? They were as follows:

  • The Director’s financial circumstances.
  • Uncertain level of Director’s future income.
  • Lack of wholly-owned property.

Case 2: Liquidator Sells Director Loan Account Balance

This was another case in which a company 2 went into Administration. The Administrator determined there was an overdrawn Director’s loan account in the sum of £1.43 million.

Over a period of three or more creditor reports, it can be seen from the extracts below the sum of £50,000 was received. This represents a reduction of 96.5% of the overdrawn balance that the Administrator was prepared to receive in exchange for the debt.

overdrawn loan account report

In this case, we can see that the inability to secure funding to pursue the overdrawn loan account was a key factor leading to the sale at £50,000.

Although in this case the overdrawn position was not cleared by the Director but by a litigation funder the position nevertheless again appears to highlight the substantial reduction that an Insolvency Practitioner accepted in exchange for settling the sum due to the company.

It shows that to avoid the cost, expense and uncertainty associated with litigating an overdrawn Director’s loan account, it is possible for a Director to negotiate significant reductions in the sums they can be required to pay.

Case 3: Third Party Settles Director Loan Account Balance

This was a case in which a company 3 went into Liquidation. The Director’s Statement of Affairs referred to an overdrawn Director’s loan account in the sum of 262,244.

The Liquidator’s first progress report to creditors referred to the sum of £15,000 being received in full and final settlement from a third party. This represents a reduction of 94.3% of the overdrawn balance that the Liquidator was prepared to settle the position for.

overdrawn loan account settled by third party

The reason that the Liquidator accepted a reduction in the sums required to be paid in respect of the Director’s overdrawn balance was because of the “Director’s personal financial position”.

This case shows just how important it is for a Director to be able to pay as otherwise, the ‘asset’ (the loan account) appears to have little or no value. A Liquidator does not usually want to pursue someone who cannot pay an overdrawn Director’s loan account.

Case 4: Negotiating In Good Faith

The fourth real-life example has been picked to show the need to act in good faith when negotiating with an Insolvency Practitioner over a company’s assets (including an overdrawn Director’s loan account).

In the relevant Court case, a Liquidator obtained an order for compensation against a Director who had purchased company 4 property from the former Insolvency Practitioner who had been dealing with the case and the judge reviewing the matter had to say:

negotiated with a liquidator in good faith

Director’s Loan Account Write Offs: Case 1, Case 2 And Case 3

When a company officer cannot pay an overdrawn Director’s loan account it is very often the case that amounts will be written off by the Liquidator seeking to realise this asset for the benefit of creditors.

directors's loan recoveries when unable to pay director's overdrawn loan account

As shown in three of the real life examples above the write offs can be substantial. The realised amount can be a small fraction of the Director’s liability to the company as show in the above three examples.

directors's loan write offs when unable to pay director's overdrawn loan account

In the real life case examples 1, 2 and 3 above, it would seem from the reports issued that the Insolvency Practitioners considered them to be examples where Directors could not pay the overdrawn loan account or for commercial reasons it made sense to settle the matter. As the charts above shows, the write offs were well in excess of 90% of the balance due to be paid in all three cases.

Whilst that might seem substantial, when it is in the best interests of creditors because a company officer simply cannot pay an overdrawn Director’s loan account balance then that is the correct decision in most if not all cases.

Unlawful Dividends, Undervalue Transactions Preferences And Wrongful Trading Investigations

In addition to an overdrawn loan account that cannot be repaid, Liquidator investigations often discover claims against Limited company Directors. These claims can lead to suggestions a Director might be liable to a company for certain financial transactions.

Such claims will most commonly be:

Whilst they are very different actions from an overdrawn Director’s loan account they can lead to the same result for the Director. The Director may have to pay money to the company.

The same considerations may be applicable to a Director who cannot pay an overdrawn Director’s loan account. Therefore similar negotiating strategies as those detailed above may be useful to help resolve matters.

What Next?

Expert Advice Is Just A Click Away

If you have any questions in relation to Cannot Pay Director’s Loan Account In 2022 And Very Worried? then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.

Our expertise is at your fingertips.

By submitting this form you agree with the storage and handling of your data by Oliver Elliot. For more details, please read our Privacy Policy.

Disclaimer: Cannot Pay Director’s Loan Account In 2022 And Very Worried?

This page Cannot Pay Director’s Loan Account In 2022 And Very Worried? is not legal advice and should not be relied upon as such. This article Cannot Pay Director’s Loan Account In 2022 And Very Worried? is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

Recent Posts / View All Posts

Can You Backdate Your Salary?

Can You Backdate Your Salary?

| Director Transactions | No Comments
You Cannot Backdate Salary Why can you not backdate your salary? KEY ISSUE - THE WORDS OF THE COURT The Court in effect had this to say about the question…
What Is The Difference Between Earnings And Dividends?

What Is The Difference Between Earnings And Dividends?

| Director Transactions | No Comments
Earnings Are A Reward In Return For A Person’s Services Overview Of The Difference Between Earnings And Dividends What Is The Difference Between Earnings And Dividends? A troubling question and…
Directors Banned For 18 Years

Directors Banned For 18 Years

| Director Transactions | No Comments
Are you a Director concerned about disqualification? Directors Banned For 18 Years. If you are a director of an insolvent company, Oliver Elliot can help you address your concerns arising…
Can You Backdate A Limited Company Dividend?

Can You Backdate A Limited Company Dividend?

| Director Transactions | No Comments
Are you a Director looking to take dividends from your company? If you are a Director of a Limited company or a bankruptcy, Oliver Elliot can help you address your…