A director’s loan account — a record of non-salary or dividend transactions between a company and its directors — can be a vital tool for ensuring both directors and the company have access to cash.
If you, as a company director, borrow money from your company, the director’s loan account is referred to as being overdrawn. If you can’t afford to pay your director’s loan account, this may cause a range of issues for your company.
Below, we’ve explained what a director’s loan account is, how a director’s loan account could become overdrawn, and the options that are available if you have an overdrawn director’s loan account that you can’t pay.
For more information on how you can deal with an overdrawn director’s loan account, continue reading below or contact us to speak to our business recovery experts.
A director’s loan account is a record of transactions that are made between a company and its directors, excluding salary payments and dividends.
As a company director, you can either add or take money from the director’s loan account. For example, in order to finance the growth of the company, you may choose to lend the company money by depositing cash into its account.
In this case, the director’s loan account is considered “in credit” and you, as a company director, are a creditor of the company.
You can also borrow money from the company. In this case, you’re a debtor of the company and will, at year-end, need to repay the loan. When the total amount of money that is taken out from the company exceeds the amount put in, the director’s loan is considered “overdrawn”.
Like other company loans and debts, any money that’s owed by you to the company or owed by the company to you is recorded as a company asset or liability.
Depending on the amount of money you borrow from the director’s loan account, you may face certain tax consequences.
Using your director’s loan account isn’t illegal — in fact, it’s a commonplace behavior that’s done in many businesses. However, if your director’s loan account is overdrawn and you can’t afford to pay it back, you may face legal consequences, particularly if your business is insolvent.
Borrowing money from your company via the director’s loan account can have tax implications if you fail to repay the loan within a certain period of time. To avoid penalties, you’ll need to pay off the director’s loan a maximum of nine months and one day after the end of the company’s year.
If your director’s loan account is overdrawn and you pay the balance late, your company will pay an additional 32.5% corporation tax. This is paid back to the company by HMRC after the loan is repaid and the director’s loan account is no longer overdrawn.
If you fail to repay your director’s loan, you may also face personal tax penalties, as well as the need to declare the benefit of the loan and pay income tax.
If your business becomes insolvent, having an overdrawn director’s loan account can potentially cause serious problems. As many as 70% of directors going through company liquidation have an overdrawn director’s loan account, making this a common issue.
In the event that the company enters into liquidation, the liquidator will investigate the director’s loan account and, if the account is overdrawn, will pursue the debt as they would other company assets.
In certain cases, this may put your personal assets at risk, making it essential that you comply with all relevant legal requirements and seek out expert advice if your business is insolvent or likely to become insolvent and you have an overdrawn director’s loan account.
You may also face legal penalties and/or significant tax implications if you take steps to clear an overdrawn director’s loan account in or shortly prior to insolvency, such as voting for the balance to be viewed as a dividend or bonus payment.
Depending on the timing of your actions and your company’s receipt of a winding-up petition, it’s possible that you could face charges of wrongful trading in the event that you attempt to clear a director’s loan account after your company becomes insolvent.
If your company is insolvent and you can’t pay off your director’s loan account, it’s important that you cease trading as soon as you become aware of the insolvency.
If you continue trading while insolvent, you could face charges of wrongful trading. In addition to this, you may be held personally liable for company debts. This is particularly important if you’ve received a winding-up petition from a creditor.
To deal with an overdrawn director’s loan account during insolvency and protect your company, contact us. Our licensed insolvency practitioners can provide advice and assistance based on your company’s circumstances to ensure you make the most effective decisions.
If appropriate for your company, we can assist with a range of insolvency procedures, including proposing a company voluntary arrangement (CVA) to creditors, entering into administration, or one of several other solutions.
For more information or to schedule your free consultation, please contact us now on 0800 9717185 or send us an email to talk to our insolvency experts.
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