Overview Of Defending An Overdrawn Director’s Loan Account Claim
This guide is about defending an overdrawn Director’s loan account claim.
In this article you’ll learn about:
- What is a claim as opposed to a debt for an overdrawn Director’s loan account
- The evidence that might usefully be considered
Defending an overdrawn Director’s loan account claim can arise if a Liquidator has demanded its repayment. A Liquidator is obliged due to Liquidator duties to realise the company’s assets. An Overdrawn Director’s Loan Account is an asset much like any other of a company.
When the demand for repayment has been lodged it is either a debt or a claim.
If your situation does not involve a Liquidator and you want to clear a Director loan account then there are alternative options that might be available to you.
What Is An Overdrawn Director’s Loan Account Claim?
If an overdrawn Director’s loan account is not disputed then it is simply a debt. If it is an undisputed debt then matters boil down to the ability to pay.
An overdrawn Director’s loan account claim is one where the sum sought by the Liquidator is claimed because the debt is disputed and not accepted.
If a Liquidator is then to pursue recovery of it they have to prove the debt is due and owing.
How Might A Liquidator Prove A Director’s Loan Account Is Overdrawn?
The starting point for a Liquidator’s attempt to prove a Director’s loan account is overdrawn is to consider if the Director has ever admitted being overdrawn in any official documents.
It not uncommon for patterns of behaviour to arise whereby transactions involving Director’s drawings follow a predictable routine. So if a Director has had an overdrawn Director’s loan account it could be an ongoing position that has existed for a number of years. The longer it has existed the greater the prospect it will appear in official company documents.
If a Director is unclear as to the position on their loan account then the starting point will be to examine documents of the company they have signed and released to third parties asserting the financial position of the company. A Director’s loan account is treated as an asset of the company. If one exists it should appear on the balance sheet in a set of accounts.
When a Director is seeking to defend a claim over an overdrawn loan account it is important they scrutinise all of the following documents which the Liquidator is likely to consider in supporting such a case.
Company Accounts Evidence
An example might be in the filed statutory company accounts at Companies House.
Typically such evidence might be found in the related party note at the end of a set of accounts which should declare the balance at the start of the year, any advances and or repayments and then a closing balance.
As the accounts are signed by a company Director (perhaps even the same Director whose loan account is claimed to be overdrawn) then the existence of an overdrawn Director’s loan account might be in effect admitted at a given point in time.
Corporation Tax Return Evidence
A Liquidator might also look to find evidence of an overdrawn Director’s loan account in official company documents as it should be disclosed in the form CT600A.
This relates to the tax on an overdrawn Director’s loan account position. For example, if historically (Section 455 tax) has been paid by the company on any overdrawn loan balance then it may show on the balance sheet as an amount of tax due back (debtor balance) to the company if the loan account was to be repaid.
Personal Tax Returns Evidence
It is important a Director checks their personal tax returns because if a loan account has been written off it should have been recorded for income tax purposes on such returns.
However, a problem could arise if a Director’s loan account has been written off within two years of the date of insolvency when the relevant company was insolvent. This could amount to a claim to a Transaction at an Undervalue and be reclaimed by the Liquidation under Section 238 of the Insolvency Act 1986.
Statement Of Affairs Evidence
The nearer to the point of Liquidation the overdrawn loan account could be shown to exist then if the Director has no evidence of the loan account balance being repaid or substantially reduced, the harder it would be for the Director to suggest the Liquidator’s claim is invalid.
This position becomes even more difficult if a Director has signed a Statement of Affairs saying that at the point of Liquidation, the loan account was overdrawn.
Oliver Elliot Comment
If there is no sign of an overdrawn loan account in any of these documents then it is likely the only way a Liquidator would be able to support a claim would be from either other accounting records of the company or an analysis of its bank statements.
If however there are signs of an overdrawn loan account from some of these documents it is still possible to defend a claim. Such documents are typically summary documents that reflect what the underlying documents such as the bank statements should show. It is possible that such documents could contain errors. However, in order to demonstrate that such a document contained an error you would typically need to scrutinise the bank statements to reconstruct the accounting of the director loan position.
