Sell An Overdrawn Director’s Loan Account Overview
The question can you sell an overdrawn Director’s loan account seems a somewhat odd proposition. Why would a company sell such a loan if indeed it could do so?
Well, companies factor their customer debts all the time in exchange for quick money to help their cash flow. Why should this be any different? Well, crucially the key distinction is the conflicts of interest because of the connection between the company and its Director.
With the exception of sale (or as legally known as an assignment) by a Liquidator, the sale of an Overdrawn Director’s Loan Account does not appear to have featured heavily in insolvency litigation over the years. This may well be because it is unlikely to solve the problem that might have motivated the sale in the first place. This is particularly so if a Director was seeking to avoid making repayment.
Can The Director Who Is Overdrawn Sell The Debt Owed In Their Loan Account?
An overdrawn Director’s loan account is an asset of a company. It is a debt. Like any debt, it conceivably can be assigned.
However, a Director clearing their overdrawn Director’s loan account off the company balance sheet is hardly something that seems likely to meet the Director Proper Purpose Test as conduct that is within the powers of a Director acting in good faith.
Generally, it would be vulnerable without full transparency being afforded to shareholders and creditors because of the risk of abuse.
But if a company is in need of cash and wants to realise this asset it could in theory assign for a discount the amount outstanding by the Director to the Company. The person buying the debt could take a long term view on the Director’s ability to repay and this might assist an insolvent company for example.
However, such a course of conduct would have to be considered very carefully because if there was even so much as the slightest suspicion that the sale was an orchestrated maneouvre to eliminate the Director’s loan account or materially reduce it so a Director paid less than they were liable to, it would likely be very vulnerable to attack if a company went into insolvent Liquidation. For example, it could be considered a Transaction At An Undervalue and consequently be deemed Misfeasance by the Director in exchanging a debt for less than its money’s worth. This potentially would result in the Director being in a similar position to the first place when they owed the overdrawn loan account but now liable to make good the loss as a breach of Director duty instead.
HMRC Tax Implications Arising From The Sale Of A Director Loan Account
If such a transaction were to be entered into then it could also be at risk of being considered attempted tax avoidance. Section 415(1) of the Income Tax (Trading and Other Income) Act 2005 taxes the individual Director (participator) who has had their Director loan account released or written off. The question is whether the shifting of the liability to a third party would be treated by HMRC as something caught by Section 415.
Can A Liquidator Sell An Overdrawn Director’s Loan Account?
Yes, a Liquidator can sell an Overdrawn Director’s Loan Account. It is not uncommon for a Liquidator to sell these loan accounts to litigation funding organisations that buy claims.
It is one of the key Liquidator Duties to realise the company’s assets. As an Overdrawn Director’s Loan Account is just another asset that has to be realised.
One way for the Liquidator to realise it is to sell it to a third party as an alternative to pursuing the Director. As the litigation funding market in the UK has expanded it has become more common to sell an Overdrawn Director’s Loan Account to a purchaser of insolvency causes of action (which includes debt claims such as an Overdrawn Director’s Loan Account.
The advantage for the Liquidator in selling the claim is to realise the loan account more quickly instead of having to engage in what can sometimes amount to an expensive and lengthy dispute which can result in litigation.
It would be one thing for a company to sell its overdrawn Director’s loan account if it was perfectly solvent with the blessing of shareholders but quite another if the company was insolvent.
