In my last post, I talked about the effect of liquidation on a company’s directors, mentioning that one potential problem arises if a director has a Director’s Loan Account with the company. So, what exactly is a Director’s Loan Account, and what are the dangers if the company is liquidated?
What Is a Director’s Loan Account?
A director is entitled to draw funds from the company as a loan, and the Director’s Loan Account will be used to record and monitor all transactions. When a loan has been taken (e.g., to cover an unexpected bill), the account will be in debit and must be repaid within nine months of the end of the company’s accounting period. If payment isn’t made within this period, the director will be charged 33.75% Corporation Tax on the outstanding balance.
Director’s loans can be complex to administer, and it’s as well to have an accountant carrying this out. However, as long as the account is correctly monitored and paid on time, there’s usually no problem — unless the company goes into liquidation while money is still owed.
Director’s Loan Accounts and Liquidation
It’s been estimated that up to 80% of company liquidations involve directors owing money to the company. The Liquidator will treat this as one of the debts owed and will seek to recover it — and this is one case where the director has no protection from personal liability.
If the director either can’t or won’t promptly repay the outstanding sum on their account, the Liquidator has the power to take them to court. The legal costs can be extremely expensive, and if funds aren’t available the court can order the director’s personal assets seized to cover the debt.
Paying Director’s Loan Accounts by Dividends
Under normal circumstances, if a director who’s also a shareholder doesn’t have sufficient cash to repay the loan in time to avoid Corporation Tax, one option is to pay it out of their dividends. This is fine — as long as the company is in profit and can therefore pay dividends.
However, many cases have surfaced where a director has claimed a dividend to make repayments when the company is already in trouble, or even insolvent. This is illegal, and the Liquidator is likely to seek recovery of any dividend paid in such a situation from the director’s personal assets.
The Best Solution — Avoid Insolvency
If a company you’re a director of is heading towards insolvency, it’s crucial to make sure (as at any other time) that every action you take is legal and won’t put your personal assets at risk.
Even better, of course, is to avoid insolvency in the first place. Many companies enter insolvency, and even liquidation, while owed money from customers which could have saved them. Give me a call to find out how I can reduce your risk of insolvency by ensuring you get the money you’re owed.