Overdrawn Directors Loan Account?
Do I Have To Repay It?
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“Life is really simple, but men insist on making it complicated.” — Confucius
Overdrawn Directors Loan Account.
An Overdrawn Directors loan Account is an asset of a company and requires repayment in a Liquidation.
A director’s loan account accounts for transactions between the Company and directors.
Suppose a director uses his credit card or his own money to pay for company expenses. The Company then owe’s money to the director. The amount Credited to the director’s loan account, until paid back to the director, showing 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.
Overdrawn directors loan account refers to when a director owes money to the Company (A Company Debtor). In Liquidation, the Liquidator will collect any overdrawn director loan account as viewed as 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 requires profit to pay drawing on account of year-end dividends)
Drawings are when the directors take money from the Company, not through the payroll and lead to the balance on the directors’ loan account, 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. Dividends require crediting 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 an 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 or unable to repay the Company.
Liquidators Duty To Collect
The Liquidator has little or no movement when this occurs (But blamed when collecting it). The Liquidator collects 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 then rewarded through the company payroll, if no profit exists.
If a company enters into Liquidation, and a balance shows owing on the directors’ loan account. The loan account forms part of the assets of the Company. Then, the Liquidator has a statutory duty to realise it.
Insolvency Practitioners try to look at loan accounts reasonably. Perhaps the report 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.
Liquidator remains duty-bound, ensuring a financial reconciliation of monies in and out the Company’s bank account and additionally account for transactions in the directors’ loan account. Liquidators request 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, reducing the balance owed.
If a balance remains outstanding, an arrangement will need to be entered with the Liquidator to repay that loan account. Maybe the director can repay the balance on the loan account using their savings.