As the name suggests, a director loan is a personal loan. So, when the company comes into liquidation, while you can write off the company, the directors loan is a personal debt.
Directors loan is simply some loan that the director takes from the company not in the form of company expense, dividend or salary. While it is completely legal to borrow money from the company, you cannot keep it as your personal money. Since business is considered to be a separate legal entity, it has its books of accounts and pays its own taxes.
So, whenever a director borrows money from the company, it should be returned with interest. The company becomes a character to the director and if in case the company comes to a closure, it has to be repaired before liquidation.
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What is the position of a directors loan account during liquidation?
The practitioner of insolvency has to assess the money that the director owes the company. It is done in the best interest of the creditors. The director is the first person who needs to pay the money to the company so that the company can further fulfil its responsibility towards the creditors. It might be a challenging situation for the director and he is personally liable to pay off all the debts.
If the director doesn’t pay off the debts, it might even worsen the situation. The director might be charged fines for wrongful trading and misconduct. Overdrawn directors loan account means that director has no protection for personal liability and his assets or at stake to pay back the debts to the company.
Situations of overdrawn directors loan account
You might be liable for many things as a director if your account is overdrawn. Let’s go through the list.
- Might have to sell his personal assets
Overdrawn directors loan tax and interest might come into the picture while paying back the loan. Director might be pushed into selling his personal assets or declaring personal bankruptcy for overdrawn loans.
- The director might have to face prosecution
Since the director is liable to pay every penny of that loan, he might be facing prosecution for wrongful trading. He will be fined and disqualified to run any limited company for the next 15 years.
- The liquidator has the option
A liquidator can choose to pursue different directions as the court might suggest. Sometimes the assets might be insufficient to pay off the debts to the creditors. In that case, the directors loan is seen as One direction available.
- The company might face insolvency service probe
If the director is asked some questions about why he had overdrawn the loan account, there can be some suspicions about the amount if it is large. The company’s policies will be reviewed again considering the fact why such a big amount was allowed for the director to borrow.
Since a director takes all the decisions of the company, it might be easy for him to have an overdrawn loan account. However, while doing that, he should consider all the costs, repayment policies and processes while paying back the loan.
It is a very crucial matter if the loan is unpaid and creditors or still left unattended. One should keep in mind that an overdrawn directors loan account is bad as the director has the money to repay without selling off his personal assets or within nine months. Still, there should be some policies on how much loan can the director get from the company. Otherwise, when the company is insolvent, there are a lot of messy situations during liquidation.
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