The answer to the question Do I Need To Repay All My Directors Loan Account As The Company Has Less Owed To Creditors? is generally, no you do not even if the company is in liquidation.
Strictly speaking, a Director is personally liable to the company for the entire overdrawn director’s loan account but the law typically does not operate oppressively.
A common misconception about director’s loan accounts and liquidation is that insolvency changes anything. It simply doesn’t.
The director who has an overdrawn director’s loan account still owes the company the amount outstanding on their loan account. Going into liquidation does not change that reality.
What Is An Overdrawn Director’s Loan Account?
An overdrawn director’s loan account is a running account of what a director owes to a company.
A company will commonly seek assistance from its directors when it is short of cash and likewise it is not unknown for a director to turn to a company they control for a handout from time to time. Although it is called a director’s loan account and although the word “loan” typically denotes lending, in reality it is simply the recording of an amount that is due between a company and a director. It does not have to take the form of loans. Companies can owe money to directors due to unpaid salary, dividends and expenses.
Looking at matters the other way, if a director has hoovered up money from the company bank account to live off or pay bills then they may overall owe money to the company. Such a position is an overdrawn director’s loan account.
Director’s Loan Account Is More Than Is Owed To Creditors, So What?
Well, if your overdrawn director’s loan account is more than is owed by the company to creditors then if it has been repaid it before liquidation insolvency might have been avoided altogether.
That might have saved the costs of putting the company into liquidation in the first place.
It is hugely important to recognise that an overdrawn director’s loan account is an asset of a company. If it is bigger than the amount of the company’s debts then the company has a net surplus of assets. Therefore on a balance sheet basis the company is solvent. However, it is on a cash flow basis that the company is insolvent and it is that which is likely to have caused it to go into liquidation.
What Is The Effect Of Liquidation?
The effect of liquidation is that the company will have incurred further costs, particularly having had to employ the services of a liquidator. As a result, the effect of liquidation will mean that the total sum required to be repaid from the director in respect of the overdrawn director’s loan account will be the costs of liquidation AND the level of creditors.
However, provided the combination of costs and creditors does not exceed the amount of the overdrawn director’s loan account and if the director and the shareholder are the same people (ie. the typical owner managed business situation) then the director should not be required to repay an amount of the overdrawn director’s loan account that is more than this because the surplus would go around in a circle back to the director after the costs and debts have been paid.
Personally Liable For All Of The Director’s Loan Account?
Whilst the director is still personally liable for the entire overdrawn director’s loan account there is a difference between the legal position and the practical requirement to repay the full amount when the costs of liquidation and level of creditor liabilities has been determined.
In most cases in small owner managed companies it would be unfair for a director to be required to pay the full amount knowing that monies would go around in a circle.
HMRC To The Rescue?
HMRC Guidance issued in September 2022 provides for the writing off of part or all of an overdrawn director’s loan account through agreement with the liquidator.
However, bear in mind that the released or written off amount will still be treated as a distribution of income to the director and as such this will crystalise an income tax liability under Section 415 of the Income Tax (Trading and Other Income) Act 2005.
A practical consideration for a director in a case where the amount of creditors is less than the amount owed under the overdrawn director’s loan account is the more discussions and the more a contest is made over the repayment of the overdrawn director’s loan account the more the costs of liquidation might rise.
A liquidator may often be remunerated on a time cost basis. So the more time the liquidator is engaged in devoting to the collection of the overdrawn director’s loan account, the bigger the bill of the liquidator might be. And who is in the circumstances of this post going to be picking up the tab? Yep, it is the Director through the repayment of the overdrawn director’s loan account.
As a result, sort out the overdrawn director’s loan account amount required to settle the costs of liquidation and to enable the liquidator to pay off the creditors (with statutory interest) as quickly and as painlessly as possible so that the fees of the liquidator may be tempered. Do not engage in a dispute over the amount of the overdrawn director’s loan account if at all possible and do so where it is relevant and the numbers make commercial sense to do so. However, there is unlikely to be much point is arguing over a £50 expense on your director’s loan account if the liquidator has a resolution from creditors to be paid at say £500 per hour.
