If you are the director of a company you may well have a Directors’ Loan Account. If you do, it is important to know what will happen if your loan is overdrawn and your company becomes insolvent (i.e. it cannot pay its bills when they are due).
What is a Director’s Loan Account?
A Director’s Loan Account is a record of any money that a director borrows from or pays into the company. It must be recorded in the company’s Balance Sheet.
What is an Overdrawn Director’s Loan Account?
When money is taken out of the company, it becomes an Overdrawn Director’s Loan Account (ODLA) and is deemed to be an asset of the company until it is repaid. This does not create a problem in itself, unless the company finds itself with cashflow problems.
If the Director’s Loan is not settled within 9 months of the company’s year-end, you will have to declare the loan on your corporation tax return and the company will have to pay the relevant tax on the loan amount. This can sometimes result in cashflow issues.
Further issues can arise if the company becomes insolvent.
ODLA and insolvency
When a company becomes insolvent the appointed liquidator has a duty to recover all the necessary assets in an attempt to cover the company’s liability – including an ODLA. This means that the director will be liable to pay back the loan – which could have a significant impact on their personal financial situation.
It is a common situation for directors to find themselves in – around three quarters of all insolvent businesses with financial problems have an ODLA. At the start of the year business could be looking good, so a director might take out a Director’s Loan confident that it can be re-paid later in the year. However, if the business hits difficulties during the year, the director may no longer have the funds to make the repayment.
Action you can take
If you have an Overdrawn Directors’ Loan Account and your company is insolvent – or it looks like it might be heading that way – then you should seek professional advice now.
Clarke Bell have advised many business owners on what they should do in this situation.
For your free advice, give us a call on 0161 907 4044 or e-mail firstname.lastname@example.org
This is too important a situation for you to ignore.