What is an overdrawn Directors’ Loan Account? They can lead to Liquidators’ Claims and even Director Disqualification at liquidation.
An overdrawn Directors’ Loan Account happens when there is a balance owed from the Director to the company at liquidation. Once a Liquidator is appointed, the Liquidator is obliged to recover any such amount that is owed by the directors, which is treated as a debt that is owed to the company. Such Liquidators’ Claims are usually paid personally by Directors. When disputed, cases can and do end up in Court, and if the Director loses, they typically end up paying legal costs as well as the claim – sums which can be hugely expensive. A Director Disqualification investigation is also a possibility.
The rules as they stand stipulate that in the time-period leading up to insolvency and a Creditors’ Voluntary Liquidation, the focus switches away from Directors towards Creditors. So, declaring a dividend in the lead up to liquidation, as an attempt to cancel or reduce an overdrawn Directors Loan Account, for example, is no solution at all.
We are seeing an increase in enquiries from struggling companies where overdrawn Directors’ Loan Accounts are an issue. Anecdotally, it is commonly accepted in the Insolvency profession that between 75% and 80% of business insolvency cases involve overdrawn director loan accounts.
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If your business is facing insolvency, the sooner you contact us, the more we can help.
Illegal Dividends
Dividends are only payable from profits, and yet we regularly see directors paying dividends as insolvency approaches and even when insolvent. Liquidators can, and do, seek to reclaim such dividends from the directors personally, because such dividends are illegal. Financial recovery action is part of a Liquidator’s remit.
Sums that directors typically take out of the company to pay for non-business personal expenses are charged to the Directors Loan Account. Then, in order to redress the resulting overdrawn position, a dividend is declared to repay the sums due before the company’s accounts are finalised. However, if the profits are not there to allow for the dividend, then any such dividend will be illegal and will be investigated at liquidation.
What can directors do about Overdrawn Directors’ Loan Accounts?
Antony Batty comments:
“As Insolvency Practitioners and recovery and turnaround specialists, our first aim is always to see if we can rescue distressed businesses. The earlier we are called in by businesses, or by their accountants, concerned about impending insolvency, the more we can do to help.”
“Where liquidation is the only available option, it is vital that businesses and directors are well advised by their accountants and referred to us at an early stage, so that they do not fall into the traps of overdrawn directors’ loan accounts and paying illegal dividends that can end up with expensive, time consuming and stressful consequences.”
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