Overdrawn Director’s Loan Account: What Happens in Insolvency?
Money taken from your company is not automatically yours because you own the company.
A director’s loan records money borrowed from or paid into the company outside normal salary, dividend, expense repayment or repayment of money previously introduced. Directors must keep records of these transactions. If the account is overdrawn when the company enters liquidation, the balance may represent money owed back to the company.
What this means for the director
Do not rely on: "My accountant dealt with it." Get the ledger. Get the latest accounts. Get the management accounts. Identify dividends, salary, expenses, repayments and drawings.
Then reconcile what actually happened. The number matters. How the number arose matters too.
What happens next
In liquidation, the liquidator takes control of company assets and seeks to realise value for creditors. An amount properly due from a director can therefore become relevant to that process. This is why the account needs to be established from records rather than recollection.
Issues to establish
Current loan account balance. Balance at the last year end. Subsequent transactions. Declared dividends. Salary and PAYE treatment. Expense repayments. Money introduced by the director. Loans repaid. Supporting board and accounting records. Whether more than one director has an account. Whether professional advice has already been obtained.
Position checklist
- Get: accounts, loan account ledger, bank statements, dividend documentation, payroll records and expense records.
- Reconcile: what entered and left the company.
- Identify: the genuine balance.
- Then: consider the consequences.
Questions directors usually ask
Is an overdrawn loan account automatically misconduct?
No such conclusion should be drawn merely from the existence of a balance. The facts and transactions need to be examined.
Can a liquidator seek repayment?
A liquidator is responsible for realising company assets for creditors, and an amount owed to the company may therefore be pursued to the extent legally due and recoverable.
Can I simply write the loan off before liquidation?
Do not make transactions or accounting changes designed to alter the creditor position without appropriate professional advice.
Related authority pages
General information disclaimer
General information only. Insolvency, tax and director-liability outcomes depend on individual circumstances. Nothing on this page constitutes legal, tax or insolvency advice. Where insolvency is suspected, advice from an appropriately qualified professional should be obtained promptly.
Establish your position
The figure in the accounts is the beginning of the investigation, not the end. Establish the transactions behind it.