Overdrawn Directors Loan Account
First of all, you are not alone. Lots of directors end up in this position when the company starts to struggle — it's what you do now that counts.
What is an Overdrawn Director's Loan Account?
An overdrawn director's loan account occurs when a director has taken too much money from the company.
It's usually best to avoid becoming overdrawn unless you know that you can repay the money quickly. A director's loan can also end up being in credit — this happens when you add your own money to the company.
The director's loan account itself acts as a record to show transactions to and from the company. Some company directors loan money from the company to be used as their salary throughout the year. This works fine, providing that your company is making a profit and is able to pay all debts when they fall due.
How Problems Arise
Problems start to arise when the company starts to hit trouble, but the director still needs to take money out of the account to live. If the company is no longer making a profit or is making reduced profits, then it's highly likely it can't pay a dividend to the director.
This results in an overdrawn loan account.
We have seen overdrawn directors loan accounts of all sizes, from a few thousand to a few million! Whatever your situation, it's important that you take advice on this as soon as you can.
What Happens to a Director's Loan in Liquidation?
Before you decide to enter liquidation, you need to check whether or not you owe a director's loan. If you do owe the company money, you are going to be asked to pay it back once you go into liquidation — and the chances are, you're not going to be able to afford to pay it back.
Thankfully, there are some options for you, but it's important that you have this conversation with the insolvency practitioner as soon as possible.
There Are Options Available
If you have an overdrawn directors loan account and the company ends up in liquidation, you will almost certainly be able to get some type of deal done with the insolvency practitioner. In almost all cases, a discount will be agreed on the amount, and you will be given some time to pay it.
Critical: Discuss BEFORE Signing Paperwork
It's critical that you have this conversation with them BEFORE you sign any paperwork. Many firms won't discuss overdrawn directors' loans with you, or they'll make comments like, "We will deal with this later down the line". That statement alone should send a shudder down your spine!
Will I Need to Pay Interest on an Overdrawn Directors' Loan Account?
Directors' loan accounts don't usually cause an issue when they are overdrawn, providing that you can repay the money within nine months of the company's year-end. If you fail to pay the money back to the company, there are tax implications, and you will need to pay the interest set by HMRC.
Standard Rate
Current interest rate
Tax on an overdrawn loan account if not repaid within 9 months
Section 455 Tax
Corporation tax penalty
If you fail to repay within 9 months of financial year-end
Significant Financial Impact
Depending on how much you take from the limited company in the form of a loan, a 32.5% tax rate can be detrimental to your finances. You will need to raise funds to cover this amount. Failure to pay these HMRC arrears will lead to legal action.
What's the Best Way to Use a Director's Loan Account?
The best way to use a director's loan account is by keeping it at zero balance or in credit.
Can I Close a Company with an Outstanding Director's Loan?
Yes, you can enter insolvency proceedings with an overdrawn director's loan account, but it will become repayable to the company. You will be expected to pay the money back, and you may not have the funds to do so.
This is why it's so important for you to take advice early on these issues. With the right guidance, a settlement can be made on your overdrawn directors' loan account, and a payment plan, in most cases, can be agreed so you get some time to pay it.
What to Do Before Entering Liquidation
Before entering a company liquidation, you need to check whether you have an overdrawn director's loan account. If you find that you do, you need to talk to us as soon as possible. If you're unsure, we can help you find out if you have one.
A Real Example
We've spoken to many directors in the past who have started a liquidation with another company for £4,000, and then later down the line, they are being asked to pay £54,000 to cover their overdrawn account.
This further financial distress causes much more worry for the director in question. As a director, you will want to avoid this — it's best to let the appointed liquidator know upfront.
How Can We Help with an Overdrawn Director's Loan Account?
Before starting any liquidation procedure, we will take the time to look into every detail of your company. Once we know the facts, we'll sit down with you and discuss your options. We always provide honest and confidential advice, regardless of your situation.
Overdrawn directors' loans can cause a lot of worry and even sleepless nights, but you don't need to continue struggling. Seek independent advice as soon as possible when dealing with financial difficulties and an overdrawn director's loan account. Our experienced team is here to support you as the director.
Why Choose Director First?
If you're in this situation, please pick the phone up and talk to us today. We are different at Director First. These issues can't be swept under the carpet, so we believe in dealing with them head-on, helping you understand how it's happened, but more importantly, how we can deal with it once you're in liquidation.
Frequently Asked Questions
Common questions about overdrawn directors loan accounts
What is an overdrawn director's loan account?
Will I have to repay my overdrawn loan account in liquidation?
What is Section 455 tax?
Can I withdraw money from my loan account before liquidation?
What happens if my loan account is in credit when the company liquidates?
Can I negotiate a settlement on my overdrawn loan account?
Stop Worrying About Your Overdrawn Loan Account
Talk to us before signing any liquidation paperwork. We'll help you understand your position and negotiate the best possible outcome.