What happens to my overdrawn director’s loan account in liquidation?

What happens to a directors' loan during liquidation?If a company enters liquidation and there is an overdrawn directors loan account, the appointed liquidator will require that the overdrawn amount is repaid.

Under UK law, if the company is unable to repay the overdrawn director’s loan during liquidation, it is considered a “loan to participator” as per the Corporation Tax Act 2010. In such cases, the outstanding loan amount may be subject to certain tax implications, specifically under Section 455 of the Income Tax (Trading and Other Income) Act 2005.

The impact of liquidation on an overdrawn director’s loan means that the director may be required to repay the outstanding amount to the company. If the company’s assets are insufficient to cover the debt, the director may need to settle the loan personally.

It is essential for directors to seek professional advice, as there may be potential tax consequences and specific regulations to consider in the context of company liquidation in the UK

Can I liquidate my company with an overdrawn directors’ loan?

Yes, Liquidating a company with an overdrawn director’s loan can present certain challenges and considerations, if a director’s loan account is overdrawn at the time of liquidation, it is typically treated as a debt owed by the director to the company. In such cases, the appointed liquidator has a responsibility to recover assets for the benefit of the company’s creditors.

However, if you wish to liquidate your company while having an overdrawn directors’ loan, it may be possible to offset the loan against any distributions or funds available for repayment to the shareholders. This process is known as “set-off.” It allows the liquidator to offset the outstanding loan against any amounts owed to you as a shareholder. The ability to offset the loan will depend on several factors, including the specific circumstances, the available funds in the company, and the agreement reached with the liquidator.

It’s important to note that the treatment of an overdrawn directors’ loan during liquidation can be complex, and seeking professional advice from a qualified insolvency practitioner or a licensed liquidator is crucial to ensure compliance with legal requirements and to explore the available options based on your specific situation

What are the implications of running an overdrawn DLA?

The appointed liquidator will demand repayment from the director(s) if you have an overdrawn director’s loan account while the company is in liquidation. If required, they will pursue you through the legal system, which in the worst situation opens the door to bankruptcy.

You might also come under investigation by the Insolvency Service since anytime a business goes into liquidation, an investigation is launched to determine what caused the business’ decline. An overdrawn DLA may be one of those causes, in which case you might be held partially accountable for the business’s financial state

Your overdrawn DLA in liquidation

According to the regulations governing overdrawn DLAs, they must be paid back within nine months and one day following the conclusion of the business’s fiscal year. You can be required to pay income tax on the outstanding amount if more than £10,000 is due to the corporation and is not repaid within this time frame since HMRC may view the withdrawal as income.

You could believe that you’ll be able to make up the overdraft in your director’s loan account when you withdraw money from the business. However, your company can encounter a period of weaker revenues, making it impossible for you to accept your regular income and bring the DLA back into line.

Unable to write off the debt

You might believe that the debt you owe to your firm can be written off when the company goes into liquidation. However, this is not the case, and the liquidator will take all necessary measures to get the money back.

This is why it’s crucial to properly understand the balance on your director’s loan account and to respond appropriately if it goes into overdraft. Knowing your obligations in this regard can protect you from personal culpability if the business eventually deteriorates to the point of liquidation.

What are the possible ramifications?

  • Inability to pay back an overdrawn director’s loan account in liquidation increases the danger of personal bankruptcy and other consequences. The loan(s) must be repaid regardless of your personal financial situation.
  • The liquidator will seek payment from you through the courts.
  • If misbehaviour is discovered, these penalties might include a 2–15 year director disqualification period in addition to personal financial hardship or bankruptcy and the liquidation of your company.
  • If any unlawful action is detected, you could be charged and given a prison term.

So what should you do if you have an overdrawn director’s loan account and are concerned that your company will be liquidated? You must obtain expert assistance as quickly as you can to learn about your alternatives, including if you may be able to write off a director’s loan.

Frequently asked questions

What happens to a directors loan account on liquidation?

In liquidation the directors loan account is treated as an asset by the liquidator and will demand that directors repay their debt to the company for the benefit of the creditors.

What happens to a directors loan if company closes?

If a company closes the directors loan and the company is defined as a limited company with fewer than five shareholders, a director's loan can be written off if that director is also a shareholder. In that situation, the director's loan will instead be treated as a distribution of profits.

Seek professional assistance

It’s crucial to contact a qualified professional as soon as you can if you think your business might need to be liquidated and you have an overdrawn DLA. You’ll learn about your obligations and what may happen if you can’t pay back.

If you are in liquidation or thinking about entering an insolvency process and unsure about how to deal with your overdrawn directors loan account simple complete the online enquiry form and one of our team will make contact.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.