What happens to a directors' loan during liquidation?

Can I liquidate my company with an overdrawn directors' loan?

You can liquidate a limited company with an overdrawn director’s loan account, however, this money the limited company is owed by its director(s) will need to be recovered as part of the liquidation process. Read our article on what is an overdrawn director's loan account to understand what it means to borrow money from your company, and how the repayment process works. 

The transactions held in your director’s loan account (DLA) represent the funds you’ve invested in your company, and the money you’ve taken out of the company that isn’t via PAYE or a declared dividend payment.

If you withdraw more money from the company than you have invested, not including salary and dividends, the director's loan account becomes overdrawn. Although overdrawn directors’ loan accounts aren’t necessarily an issue when business is good, they do take on specific significance should a company enter liquidation.

Essentially, the funds you’ve taken are owed to the company and appear on its balance sheet as an asset to be collected in by the liquidator.

 

 

 

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Overdrawn directors’ loan accounts and liquidation

It is important to note that the insolvency practitioner's overall responsibility is to the company’s creditors, even if you were the one who appointed them to handle the liquidation of your insolvent company.

As part of their role, the insolvency practitioner has a duty to realise the business’ assets and collect in all debts for the benefit of creditors. This includes any outstanding overdrawn balance on a director's loan account.

“Called for help with closing non-trading companies and Chelsea advised me on what to do and instead of taking advantage as others would by taking on the case and charging loads. She gave me a solution that would cost £20. Very pleased with the service and thankful for Chelsea’s advice.”

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Chelsea Williams
Business Debt Expert

What are the rules surrounding an overdrawn directors' loan during liquidation?

So what should you do if you’re worried that your business will be liquidated and you’re running an overdrawn director’s loan account? It’s vital that you seek professional support as soon as possible, to find out your best options, including whether it's possible to come to an arrangement over the repayment of a director's loan.

Seeking professional help and guidance

This is a complex area of business, however, particularly when a company declines. If you’d like to find out more about directors’ loan accounts and liquidation, and whether you can write off or come to an arrangement with your director's loan, Real Business Rescue can help.

We’re insolvency specialists and will provide independent advice on your situation. Please contact one of the team to arrange a free same-day consultation at one of our network of offices nationwide.