Director’s Loan Account Writing Off When Insolvent: Can It Be Done?

Director’s loan account writing off when a company is insolvent can be very difficult. There can be a difference between the accounting requirements and the effect of company law. 

If a company is insolvent you are simply not able to write off its assets even if the shareholders agree by way of what is referred to as ratification without the risk of it backfiring as a breach of director’s duties. 

What Is The Difficulty Of A Director’s Loan Account Writing Off?

The difficulty of writing off an overdrawn director’s loan account is that it can be legally ineffective when a company is insolvent before liquidation because of the Creditor Duty.

An overdrawn director’s loan account is simply another asset of a company on its balance sheet. It is the duty of a director to safeguard and preserve the company’s assets, acting in the best interests of the company not acting in their own best interests at the expense of the company.

The insolvency regime looks to protect creditors of a company from the loss of assets. That is why there are provisions that enable an Insolvency Practitioner to unwind transactions that have been entered into shortly before liquidation that were not in the interests of creditors. 

Examples of such matters will involve what is legally known as follows:

• Transaction at undervalue
• Preferences
• Misfeasance

Ratification Of A Breach Of Director’s Duty

Ratification under Section 239 of the Companies Act 2006 of a breach of a director’s duty may be approved by the shareholders by way of an ordinary resolution subject to the requirements. This can be brought into effect under the Duomatic principle from Re Duomatic Ltd [1969] 2 Ch. 365, 373C is as follows:

where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.

However, this does not apply to an insolvent company as held by BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25. 

… the ratification principle does not apply to a decision by shareholders which is either (i) made at a time when the company is already insolvent or (ii) the implementation of which would render the company insolvent…

Writing Off A Director’s Loan Account Overdrawn In Liquidation

A director’s loan account that is overdrawn can be written off in liquidation. However, this needs to be done by the liquidator; it cannot be done by the director who loses their powers under Section 103 of the Insolvency Act 1986.

A director’s loan account written off by a liquidator will have tax consequences for a director personally that require to be considered.

For a more details look at the question can you write off an overdrawn director’s loan account see our guide.