How To Avoid Misunderstandings Between Liquidator And Director Over The Director's Loan Account

Misunderstandings between a liquidator and director over the director’s loan account are not uncommon, particularly when it is likely to amount to an overdrawn director’s loan account. You have to look at the facts and evidence to deal with the matter.

A key way that this article looks at to overcome such misunderstandings is through communication between the two parties to try to avoid it descending into an adversarial position.

Liquidator’s Stranger Problem

A liquidator is bound to address the matter of an overdrawn director’s loan account as part of their duties as a liquidator. The liquidator has a duty to identify the assets, realise them and then distribute them to creditors (and shareholders) after the costs of liquidation have been paid.

Unlike many professionals when undertaking their role, a liquidator enters the role as a stranger to the company.

This means they need information from the directors.

Ways For A Liquidator To Obtain Information

There are two primary ways for a liquidator to address matters of information needed to overcome their lack of knowledge about a company and its transactions:

1. Assembling the Company’s relevant records which a liquidator’s duties compel them to do in any event.
2. Obtaining explanations from the directors as to transactions unexplained by relevant records.

Potential Limitation Of Information From Other Sources

There are other sources of information such as from accountants but for the company’s final period these may be less relevant when the accountant might not have been instructed to prepare accounts for such a period. This is commonplace when an accountant is instructed often once a year by a small company after the company’s financial year end.

Accountants prepare annual accounts based on the information and instructions supplied by their clients. An accountant does not usually create the transactions but more commonly assembles and allocates (ie. accounts) for the transactions on client instructions, so that the client can fulfil their reporting and compliance obligations.

Where relevant records are insufficient to explain transactions then by definition a liquidator will look to obtain the information from a director in charge of the Company who is taken to know why they have entered into transactions. This is particularly the case when those transactions involve personal receipt of money from the company.

How To Resolve Misunderstandings About An Overdrawn Director’s Loan Account

In relation to the resolution of misunderstandings about an overdrawn director’s loan account there are typically two aspects so they can be dealt with by:

1. Establishing the facts of the relevant transactions.
2. Assembling the evidence for those transactions which underpin the facts so that the facts asserted can be shown to be correct as far as reasonably and practically possible.

Director’s Receipt Of Company Money

There are four typical discrete ways for a director (who is also a shareholder) to receive money from an owner managed company:

1. Salary
2. Dividends
3. Loans
4. Repayment of expenses incurred on behalf of the company

Burden On A Director To Explain Director’s Loans And Company Monies Received

Whenever a transaction involves a receipt of money from a company directors really need to be able to explain the transactions individually, not globally in generic terms. An explanation which conflates more than one explanation might be of limited assistance.

It is not unknown for a director to suggest that receipt of company money is say for example a combination of dividends and salary. Such an explanation is likely to be of limited use because it does not advise whether it is asserted to be dividends or salary. Receipt of company money by a director cannot be both because a dividend payment is distinctly different from a salary payment.

Review of information on an accounting records online platform also may only take matters so far for a liquidator to unscramble because transactions can be misallocated or misposted for example within such records, particularly when they are done using a form of artificial intelligence by automated analysis of bank transactions. The directors need to identify them specifically.

It is not really for the liquidator to speculate; it is for the director to assert.

Separate from that there ought to be evidence available from the company’s books and records which enables verification as to why a transaction is labelled as say dividends or salary. Such documentation needs to be provided so that a liquidator is able to understand the basis for the explanation of a transaction.

This process should enable a liquidator to establish and reconcile the director’s loan account so that whatever the position happens to be it can then be resolved.