Where to Begin?

Whilst it may be extremely common for a director of a company in financial difficulty to take a loan from the business, it should be done with caution. Any money held within the business needs to be treated as an asset. These are the first point of review for any insolvency practitioner (IP) or liquidator involved in a formal process. If you find yourself having been in receipt of a company loan but are now struggling to repay it, there are certain considerations and ramifications.

What happens when your company becomes insolvent?

If you are the director of a business facing insolvency, it is imperative that trading ceases immediately. This will mitigate the risk of the company taking any further credit agreements that they will struggle to pay back and reduces the chance of wrongful trading accusations.

If at the point of becoming insolvent, you have an outstanding director’s loan owing, there will be a negative impact on the creditors. After all, were this money still held within the business, the funds could be used to repay some of the business’s debts. The liquidator working on the process will be looking to ascertain the best outcome for the creditors, and any overdrawn DLAs will be taken into consideration. In fact, they will be looking to have that money repaid to the business so that it can be used towards their repayment. The liquidator will see the director as having spent the creditor’s money.

As a result of this, the liquidator will most likely want this money brought back into the business as this would be in the creditors’ best interests. If you cannot repay it from personal funds, it is important the company does not seek to write the loan off as a bonus or dividend payment as this could be viewed as a ‘preferential payment’. Furthermore, any additional bonus or dividend payments should be avoided as this would effectively increase the debt on the DLA.

In some cases, if the loan is insignificant compared to the size of the overall problem the business is facing, it might be that the liquidator will allow it to be written off. This would be subject to individual circumstances.

If the company is not entering into voluntary liquidation and has instead been served a winding up petition by its creditors or by HMRC, then larger issues could be faced by the director in receipt of the DLA loan. The director could be accused of wrongful trading or misfeasance, the implications of which can be devastating.

Next Steps

Whether or not you have an overdrawn DLA, if your company is heading to insolvency, it is important to ensure you speak with experts in this field to avoid any negative situations arising. There are formal processes to follow that will allow the company to act in a lawful way that best suits the creditors, thus safeguarding the directors within the company. So, if you believe your company is in financial difficulty, get in touch with 1st Business Rescue to find out more. You can call us on 0808 196 8600, message us on 07717738167 or send us an email at help@1stbusinessrescue.co.uk.

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