Updated: 13th May 2020
If you withdraw money from your own company that is not classed as a dividend or salary payment, and the total withdrawn is less than the money you’ve invested, your director’s loan account will be overdrawn.
This situation has serious implications for your personal finances if the company starts to experience financial problems, as an overdrawn director’s loan account is regarded by a liquidator as an asset to be realised.
Unlike sole trader operations a limited company is a separate entity in law, so when more money is taken out than has been invested by a director, the difference becomes an asset on the company balance sheet.
During a liquidation process, the appointed insolvency practitioner (IP) must work on behalf of unsecured creditors to achieve the highest returns possible. Consequently, you may be asked to repay the money you owe the company immediately, which may or may not pose a problem depending on your personal financial situation at the time.
Bear in mind, however, that if you have also provided personal guarantees for other company loans, these are likely to be called in once the company enters insolvency. The resultant financial pressure can be extreme, jeopardising your home and other assets that may need to be sold to meet this demand.
The worst case scenario could see your own personal bankruptcy run alongside the insolvency of your company. Not only would you lose all your personal assets, but also the ability to earn a living via the company.
In some cases it may be possible to negotiate a settlement for creditors with the liquidator, instead of being forced into bankruptcy, but individual circumstances will dictate whether this is likely.
The liquidator will investigate the actions of all directors leading up to the date of insolvency, and the outcome of this may determine the extent of their actions in recovering the money.
These investigations generally go back two or three years, with directors facing up to 15 years’ disqualification for unfit conduct, or if they are found to have traded unlawfully. It will not be possible to write off the loan in the company’s books, as again, the liquidator will uncover any ‘dubious’ transactions, and make subsequent allegations of misconduct.
The IP’s focus will be on finding particular types of transactions, including:
Transactions such as dividends taken when there are insufficient distributable reserves will be noted, as in those circumstances the dividends are regarded as illegal. These may also need to be repaid for the benefit of creditors, and can result in further investigations by the Insolvency Service.
Clearly, the ramifications of holding an overdrawn director’s loan account are complex, and often underestimated by directors when business is good. You should always keep detailed records of all monies invested and withdrawn from the company, as well as board minutes in connection with the granting of dividends.
With so much at stake, it pays to seek professional advice and minimise the threat of personal bankruptcy in these circumstances. As part of the Begbies Traynor Group, the UK’s leading business recovery firm, Real Business Rescue can provide confidential, professional guidance on the best way forward.
If your company is facing insolvency and you have an overdrawn director’s loan account, call one of the team for a same-day appointment free-of-charge. With 78 offices across the UK, you’re never far away from expert and confidential advice.
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