What Happens To An Overdrawn Director’s Loan Account On Liquidation?

Overview Of What Happens To An Overdrawn Director’s Loan Account On Liquidation

In order to consider what happens to an overdrawn loan account on Liquidation the starting point is to first identify what is an overdrawn Director’s loan account. Secondly, it is important to know what the balance is and with the Director having ensured proper company books and accounting records have been kept.

What Is An Overdrawn Director’s Loan Account?

An overdrawn Director’s loan account is a sum of money owed by the Director the company. 

It means after accounting for the monies the Director has withdrawn from the company and after taking into account all amounts he or she has lent or entitled to receive from the company (such as all salary, expenses and dividends) there is a balance owing by the Director to the company.

It is therefore an asset of the company. It is the Liquidator’s duty to recover it.

If the company goes into Liquidation then what happens to the Director’s loan account depends on the type of Liquidation. If the company is insolvent it can either go into Creditors Voluntary Liquidation or Compulsory Liquidation. This article mainly concentrates of its effect on insolvent Liquidations.

Repayment Of The Overdrawn Director’s Loan Account On Liquidation

Perhaps the most common issue for a Director with an overdrawn Director’s loan account on insolvent Liquidation is they are faced with a Liquidator that asks for it to be repaid to the company.

If the Director is asked but cannot pay the overdrawn Director’s loan account to the Liquidator they could face legal proceedings which could potentially lead to their personal Bankruptcy. It is a serious matter that should not be overlooked.

Writing Off An Overdrawn Loan Account On Liquidation

An overdrawn Director’s loan account is not written off automatically on a company going into Liquidation. 

However, it is possible for the Liquidator to write it off if he or she considers it is not going to be recovered from the Director. If that were to happen the Director typically would be required to declare this on their personal tax returns and suffer income tax on the sum written off. As a result, it is a position that we would urge you to take independent professional advice on.

Director Conduct Reporting On Liquidation

It is a requirement that the Liquidator reports on the conduct of the Directors to the Director Conduct Reporting Service which is operated by the Insolvency Service. 

When a Director has an overdrawn Director’s loan account that has contributed to the causes of the company going into Liquidation then this is likely to be reported by the Liquidator to the Insolvency Service. This could then open the Director up to being investigated and considered for Director Disqualification Proceedings. A disqualified Director could appear in the public Register of Disqualified Company Directors.

Solvent Liquidation

Regardless of the type of Liquidation an overdrawn Director’s loan account is always an asset of the company. However, if the Liquidation is a solvent Liquidation, called a Members Voluntary Liquidation then the Liquidator will typically distribute the loan account to the relevant shareholder. This assumes that the Director was a shareholder which is very common for most small owner managed companies.

Oliver Elliot Comment

If you are a Director concerned about an overdrawn Director’s loan account and the implications then get in touch as our advice is at your fingertips. It is important that you are able to consider all the options available to you and make an informed decision as to the way forward with consideration of the wider ramifications that may arise including defending an overdrawn Director’s loan account claim.