First of all, I want you to know that 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.

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.

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. 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!

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.

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.

Tax on an overdrawn loan account is currently set at 2.25%. If you fail to pay the money back within nine months of your company’s financial year-end, you will need to pay a higher interest rate. The interest rate on an overdrawn director’s loan account is currently set at 32.5%. This corporation tax penalty is known as Section 455 tax and must be paid within your company tax return. Failure to pay these HMRC arrears will lead to legal action.

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. Therefore, you are better off not using loans from the account or ensuring that you can pay the outstanding loan back early to avoid paying further company interest and corporation tax.

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. Be aware that if your company enters liquidation with credit in your loan account, it’s unlikely that you’ll be able to claim this money back. You should also be wary of withdrawing the money just before entering a liquidation procedure, as this will be seen as a preference payment.

I’m thinking about closing a company with an outstanding director’s loan – am I allowed?

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 with overdrawn directors’ loan accounts in 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.

We’ve spoken to many directors in the past who have started a liquidation with another company for £4000, 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, and therefore, 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.