Are Directors Jointly Liable For Overdrawn Director Loan Accounts? The starting point is each director can only be liable (as a matter of a debt) for their own director’s loan account that is overdrawn.
It will of course depend on how matters have been recorded in the company’s books and shown in the accounts (and or the Statement of Affairs) but an individual is not liable for the debts of another without something more.
So for instance, a wife is not liable for their husband’s personal credit card simply because she is married to her husband.
It might be considered a rather unsatisfactory position if any individual however closely connected to another whether through marriage, companies, trusts, family or friendship could be automatically jointly liable for the debts of another without agreement or knowledge.
Ah hah you say, there is a difference where a company is concerned, there is the small matter of knowledge. Very true indeed.
Where a company is concerned there is a difference because the Directors are required to ensure they know what the financial position of the company happens to be and keep themselves informed.
An Example
Example – if the facts are that Director A is overdrawn and Director B is in credit, then it is not possible as a matter of a straight debt claim, for Director B to be liable to the Company for Director A’s overdrawn position.
In other words, Director B is not liable to the company for Director A’s liability. However, hold that thought, because before Director B opens the champagne with a sigh of relief, a debt claim is not the only way a Director can be liable to a company on this type of issue.
Breach Of Duty With Overdrawn Director’s Loan Account
A Director can also be liable when they have breached their duty and are guilty of misfeasance. A Director must act within their powers for a proper purpose set out in the Company’s Articles and this means they have duties under Sections 171 and 172 of the Companies Act 2006 for example – act within powers and good faith.
Misfeasance is a compensation claim matter; it is not a debt per se, it is a claim. Unlike a debt arising from an overdrawn Director’s loan account (which often sprouts within ‘Other Debtors’ on the balance sheet), you will typically not see a misfeasance claim perched on the balance sheet. Because it is a claim you cannot label it a simple liability. A Court of course may well make an Order for compensation based on a claim issued say by a liquidator.
So if in the example Director A hoovered up substantial sums from the company when it was insolvent or on the verge of insolvency (and their director’s loan account went overdrawn) then because of something known as the Creditor Duty (which arises from the Sequana decision in the Supreme Court which endorsed the rule in West Mercia Safetywear Ltd (in liq) v Dodd [1988] BCLC 250 – ie. an insolvent position means a Director has to take into account on a sliding scale the interests of creditors) then both Director A and Director B can be liable for the breach of duty.
Director A has personally benefitted from the misfeasance (which might also depending on timing be a transaction at an undervalue under Section 238 of the Insolvency Act 1986) and Director B could be in the firing line because he or she may have caused or permitted the deployment of the company’s funds to favour Director A ahead of the interests of creditors.
This all means that you could be liable for a co-Director’s overdrawn director’s loan account but not because of their debt but because of your own breach of a duty that you owed to the company.
