3 Mins
What is a Director’s Loan Account (DLA)?
A Director Loan Account (DLA) sits in the company’s accounts and records transactions between the company and the Director. If there is more than one Director, each will have their own DLA account.
The DLA records Director withdrawals from the company which are not salary, company expenses repayments or approved dividend payments. The DLA will also record any loans the Director has given to the company. The DLA will show a net credit balance due to the Director, a net overdrawn balance due from the Director or a nil balance if any outstanding sums have been repaid.
On insolvency, the Director is entitled to submit a claim for any credit DLA balance due to him from the company but where there is a overdrawn DLA balance the Insolvency Practitioner (IP) will seek repayment from the Director as an asset realisation.
Bringing a Director’s Loan Account balance up to date
Directors should ensure DLA records are as up-to-date as possible prior to an impending insolvency and should speak to their accountant if they have any concerns.
Director counter claims or mitigation
If the Director is also a Shareholder, it may be possible for an overdrawn DLA balance to be reduced by the declaration of a shareholder dividend at the company’s year-end if there are sufficient profits (distributable reserves) at the year-end to enable a dividend. This must be properly documented.
If the Director has repaid sums back to the company or personally paid company expenses, this will reduce any overdrawn DLA balance.
Where a Director is also an Employee and is entitled to make a claim to the Redundancy Payments Service following redundancy on insolvency, any payments due from the company as an employee will be offset by any balance due to the company under the DLA.
Tax implications of Director’s Loan Account
Companies will incur Corporation Tax if there is a DLA balance over £10,000 which is not repaid within 9 months of the Corporation Tax accounting period end.
Companies should declare any DLAs as a ‘benefit in kind’ on P11D and deduct Class 1 National Insurance unless the loan is interest bearing.
Quantification of Directors Loan Account balances
On insolvency, the IP will review the company’s accounts, books, and records to establish the existence of a DLA. The IP will also review the company’s bank statements to establish the cash transactions between the Director and the company and check that these have been recorded in the company’s records.
If any dividends have been declared that reduce any overdrawn DLA balance, the IP will check for formal board minutes and dividend certificates recording the dividend values and check that there were sufficient profits in the period from which to pay the dividend.
Recovery of overdrawn Directors Loan Account balances on Insolvency and risks to Directors
Once the DLA is quantified and a net overdrawn DLA balance has been identified, the IP will request repayment from the Director. A proposal for repayment over a reasonable period of time may be acceptable.
The IP will consider the Director’s personal assets and income as part of any repayment proposal.
If the Director does not comply with a request to repay an overdrawn DLA balance, the IP may take legal action and if the Director cannot afford to repay the balance, they may be at risk of bankruptcy.
If the Directors are not the Shareholders, any Director loan of £10,000 or more needs to be approved by the Shareholders. Taking a Director Loan without Shareholder approval could be considered theft or misfeasance.
If a DLA balance was reduced by the declaration of a shareholder dividend but the IP identifies that there were not sufficient profits in the period to allow a dividend, the dividend will be classed as illegal and the IP will request a repayment of the amount from the Director.