Director’s Loan Accounts Explained
One thing to check before you enter into any insolvency proceedings is your director’s loan account.
A director’s loan account, or a DLA, is a record of transactions between the company and its directors. Any funds you draw from the company will be allocated to a director’s loan account. Similarly, any funds you introduce will create a credit on the director’s loan account.
Most directors introduce capital into a company when it is set up. This is how a director’s loan is created. You may then take your earnings as loans from the business, and then convert them to salary and dividends at a later date. An overdrawn director’s loan isn’t necessarily a problem provided the director can repay it or offset it within nine months of their company’s year-end.
This way of taking money from the company when used correctly has numerous tax advantages. However, if you enter into an insolvency procedure, it can leave you in a position where you owe the company money.
If you have to place your company into liquidation, the loan then becomes repayable to the company, and this is where the problem arises. Lots of directors choose to appoint an insolvency practitioner without checking this first, which can be a very costly mistake. The insolvency practitioner is duty-bound to recover the amount of the director’s loan in full. If you have assets such as investments or property, it’s imperative that you take advice on how best to protect these before you choose to appoint a liquidator.
How do we assess a director’s loan?
We will look at the company’s last set of accounts and use this as a starting point. Then we will look at all the transactions from the date of the accounts up until now, totalling all the amounts paid from the company to the director. We then allocate any salary through the PAYE scheme, personal spending for the benefit of the company and any credits you have made back into the company personally. The director is then left with the final balance of the director’s loan. If the loan is overdrawn, then the director owes the company money, and we will discuss how it is to be repaid. If the director’s loan is in credit, then the company owes the director money, and they will be treated like any other creditor. If the insolvency practitioner recovers funds, then a dividend is paid out pro-rata to all creditors.
If you are owed money from the company, it’s important that you don’t repay it before you go into liquidation as this could be classed as a preferential payment.
What are your options if you have an overdrawn director’s loan account?
It’s an insolvency practitioner’s duty to recover money on behalf of the creditors’ interests. It is our advice to all our clients to review the director’s loan position in full before you appoint a liquidator and look to arrange a settlement before you go into liquidation. An insolvency practitioner can make a commercial decision on how these funds are recovered. To discuss your situation in more detail, please get in touch for a confidential chat with one of our experienced team.