A liquidator has a duty to investigate the affairs of every company they are appointed on. Of particular interest are payments to directors. This is the second in a series of articles that look at the different types of payments that may be made to directors, what a liquidator will investigate and the consequences. This article looks at Director Loan Accounts.
A Director Loan Account (DLA) is maintained in the company’s accounting records and details certain transactions between a director and the company (excluding salary/wages, business expense repayments and shareholder dividends).
If a director has loaned more money to the company than they have withdrawn from the company the DLA will have a credit balance. In an insolvency, the director will rank as an unsecured creditor and will be able to submit a claim for the next balance owed to them.
Conversely, a DLA will be overdrawn if the director has withdrawn more money from the company than they have loaned to it. In an insolvency, an overdrawn DLA balance is a potential asset of the company which the Liquidator has a duty to investigate and recover for the benefit of the creditors.
If the books and records of the company are not up to date at the point the company enters liquidation, the Liquidator will review the transactions of the company to establish what whether there is an overdrawn loan account.
If there is an overdrawn DLA, the Liquidator will request payment. If due to the financial circumstances of the individual this cannot be repaid in full, the liquidator may agree to write a portion of the debt off or allow it to be repaid in instalments over a period of time.
Where a liquidator has written off a loan, HMRC may treat that write off as meaning that the director received it as income and request that the director includes it in a personal self-assessment tax return and pay income tax.
Click here to read the first article about unlawful dividends.