The answer to the question do I need to remortgage my house to repay an overdrawn director’s loan account in a liquidation is no you do not. There are options which can be considered but the matter will depend on a director’s financial circumstances.
However, even if a remortgage was a preferred strategy it might not be available if the director’s income is insufficient to satisfy a lender of their ability to service the debt going forward and alternative forms of equity release might not be available.
Is A Remortgage The Right Option?
There can however be circumstances in which it might be an option to consider depending upon individual personal financial position. This is a matter perhaps to take independent financial advice on personally.
Alternative considerations might be available such as:
- Making regular contributions from surplus income.
- Asking a third party to assist with the repayments.
- Selling other assets to raise funds.
- Raising finance on other assets.
- Sale of the home instead.
A not uncommon situation is a director who owes a company money but without sufficient liquid assets and cash to repay the overdrawn director’s loan account when the company goes into liquidation. However, it is not unknown for such directors to have a property and in some cases, it may have substantial equity tied up in it.
What Is An Overdrawn Director’s Loan Account In A Nutshell?
An overdrawn director’s loan account is a debt due by a director to their company. They are liable to repay it.
It will have arisen because the director will have had more money from a company than they were entitled to.
Why Can An Overdrawn Director’s Loan Account Get Worse?
It tends to be a situation that builds over a number of years and it can get worse as a company gets into more financial difficulties.
A company in financial trouble may mean that taking dividends is not possible due to an absence of distributable profits and instead paying a salary might be hampered due to cash flow restrictions due to the tax payments also required.
Asset Rich But Cash Poor
When a director is asset rich but cash poor then the equity in property might be the only way to repay some or all of their director’s loan account on a timely basis.
Ultimately however it is for the director to consider how they wish to repay the overdrawn director’s loan account. It is not really for anyone else to determine how such a personal debt should be repaid except where a court has stepped in and the matter has been forced by a liquidator.
Time Is Not Unlimited When Repaying A Director’s Loan Account
Time is of some essence because the duty of the liquidator is to realise the assets so they can pay the costs of liquidation and then use any surplus available to make a distribution to creditors. A liquidator cannot realistically keep a liquidation open for decades whilst someone makes small but regular contributions to repay the director’s loan account. The costs of such a lengthy liquidation process would make the propositions commercially a non-starter.
That does not mean a liquidation cannot be kept open for a period of time if regular payments are being made that will enable repayment of an agreed portion or all of the overdrawn director’s loan account. It is a matter of judgment at the liquidator’s discretion as to what is reasonable as they are able to make commercial decisions.
However, where a director has substantial equity tied up in a property the matter is more complicated because a liquidator could ultimately obtain a judgment against the director and then potentially obtain a charging order over the property to secure the debt. This could then lead to the sale of the property.
