Directors Loan Account
Do you have a directors loan account?
A director’s loan account is an account of transactions between the Company and directors.
If a director uses his credit card or his own money using other sources to pay for some company expenses. The Company will then owe that money to the director. The amount will be credited to the director’s loan account, showing until paid back to the director, as a creditor. (That is, the Company owes the director). If the director uses money or a credit or debit card from the Company. Then any payment will be debited to his loan account, and he will be a debtor of the Company until credits appear reducing the balance or indeed paying it back. (In this case, the director owes money to the Company)
The loan account accounts for these transactions and accurately will reflect the position of the account at a given time. (Like a bank statement).
Directors Loan Accounts (OVERDRAWN) and in Liquidation.
An overdrawn directors loan account is when a director owes money to the Company (A Company Debtor). In Liquidation, the Liquidator will collect any overdrawn director loan account as it is a debt owed to the Company.
Accountants advise directors, especially when also shareholders that the most tax-efficient way to pay themselves is by paying enough through the company payroll to cover National Insurance Contributions, then the balance as drawings. (This though may only be done, if the Company makes enough profit, to pay the dividend to pay the drawings)
Drawings are where the directors take money from the Company, which usually means that the balance on the directors’ loan account is overdrawn, i.e. the director owes that money back to the Company.
At the year-end, the accountant acting for the Company finalises the available profit and declares an annual dividend. This credited to the directors’ loan account, which hopefully along with other potential credits clears the overdrawn balance and may show the director as a creditor of the Company.
If though, the Company has made insufficient profit to clear the directors’ account. Then the account is overdrawn, and they owe the company money, presenting a problem once a liquidator is appointed, as often, directors have either forgotten about the company debt or cannot repay upon demand.
The Liquidator has little or no movement when this occurs (But is often blamed when collecting it). The Liquidator must collect all debts owed to the Company as part of their duty. Directors must be advised by their accountants to monitor the situation monthly. When profits reduce, tax-saving will no longer be a priority. If this is the situation, it may be the director is remunerated through the company payroll if no profit exists.
If a company enters into Liquidation, and there is a balance owing on the directors’ loan account. The loan account is an asset of the Company. Then, the Liquidator has a statutory duty to realise it.
We try to look at what is reasonable. Perhaps the account has not been updated with what the director may have paid out on behalf of the Company but not accounted for it, by way of a legitimate expense voucher.
It is though a duty for the Liquidator to ensure a financial reconciliation of monies in and out the Company’s bank account and account for transactions in the directors’ loan account. A Liquidator should also ask the directors for receipts and evidence to support any claim that the directors may be able to make.
These amounts, if correct and verified, can be deducted from the directors’ loan account, which will reduce the balance that the director owes the Company.
If there is still a balance outstanding, an arrangement will need to be entered with the Liquidator to repay that loan account. If maybe that the director can repay the balance on the loan account using their savings.