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A company must keep a record of a director’s loan account. This will show cash withdrawals paid directly to a director and any personal expenses of the director paid for by the company. Personal expenses are anything that was not incurred for the purpose of the business and must be paid back.
At the end of a period, the director will either owe money to the company or the company will owe money to the director. Interest should be charged on the loan.
A director’s loan can be offset by the payment of a dividend if there are sufficient funds available. If not, there will be an overdrawn director’s loan account. If the business continues to trade then the loan can remain outstanding until it is either repaid by the director, or there are future profits to allow offset by dividend. If it remains outstanding more than 9 months after the end of the accounting period there will be corporation tax to be paid on it (known as s455 tax).
What happens when a company with an overdrawn director’s loan account enters insolvency?
Where the company enters insolvency and there is an outstanding director’s loan, it will need to be paid to the liquidator. This can be by instalments over a period of time.
If the accounting records are not up to date, a liquidator will look at the transactions the company has undertaken to establish whether there is a director’s loan outstanding. Sometimes, where there is an overdrawn account the director is confused as to why this is the case as they have drawn the money out in the same way that they always have. Where a company has been loss-making, as is often the case in the period leading up to insolvency, there will have been insufficient profits to pay dividends. Even if the director hadn’t realised there was a loan it still must be repaid.
Can a company with an overdrawn director’s loan account be struck off?
If a company has an overdrawn director’s loan account it’s likely that there will be monies due to HMRC or other creditors. If a director applies to strike off the company it is likely that one of the creditors will object and the striking off will not proceed. If there are no objections the company may be dissolved, but creditors may apply to court to have the company reinstated and appoint a liquidator to seek repayment of the loan. In addition, the government can investigate the affairs of dissolved companies and take action against the directors.
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