Overdrawn Directors Loan Account.
An Overdrawn Directors Loan Account is an asset of a company and therefore requires repayment in a liquidation.
A director’s loan account accounts for transactions between the Company and the then directors.
Suppose then a director uses his credit card or his own money to pay for company expenses. The Company then owes money to the director. The amount credited to the director’s loan account, until paid back to the director, will then show as a creditor. (That is, the Company owes the director). Suppose 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 to reduce the balance or indeed pay it back. (Here, the director owes money to the Company)
The loan account accounts for these transactions and accurately reflect the position of the account at a given time. (Like a bank statement).
However, once a company enters insolvency, matters for directors can turn awkward. For further reading, please view ‘what is insolvency?
Important points to remember about Director’s Loans
- You may only vote yourself a dividend if you are a shareholder;
- If your company operates at a loss, you must not draw down any dividends;
- Do take drawn down any dividends if your company is insolvent and still trades;
- If you have an overdrawn director’s loan in a liquidation, it requires dealing with, as it will not go away;
- Ensure you repay your loan within nine months, or face interest and tax.
IMMEDIATE HELP FOR DIRECTORS LOAN IS AVAILABLE TODAY!
How long do I have to repay a Director’s Loan?
Director’s loans should be paid back within nine months of the financial year-end of the company, so not classified as “overdrawn.”
Records You’re Required To Maintain
Directors must ensure that records of accounts remain maintained at all times. Likewise, a record of monies you borrow from your company or pay into the company must be kept up to date. This account is referred to as a ‘director’s loan account’.
At the end of your company’s financial year
Ensure ALL monies owed by directors to the company or the company owes you remain reflected on the company’s ‘balance sheet’ in your annual accounts.
Overdrawn Directors Loan Account and Tax on loans
You probably may be required to pay tax on the director’s company loans. Additionally, your company may be responsible for paying tax if you’re a shareholder (‘participator’) and a director.
Your personal and company tax depends on whether any director’s loan account remains:
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 considered 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)
Company directors drawings exist when directors take money from the Company, not through the payroll, and lead to the balance on the directors’ “credit account being overdrawn. i.e. the director owes 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 credit to the overdrawn 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 earned 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.
Overdrawn directors loan account and Liquidators Duty To Collect
The Liquidator has little or no movement when overdrawn directors’ loan accounts occur (but then blamed when collecting it). The Liquidator collects all debts owed to the Company as part of their duty. Their accountants must advise directors 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 Liquidation, and a balance shows owing on the overdrawn directors’ loan account. The loan account is part of the Company’s assets. Then, the Liquidator has a statutory duty to realise it. Please read for further detail the liquidators role with overdrawn directors loan accounts.
Insolvency Practitioners attempt to look at overdrawn directors’ 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 committed and ensures a financial reconciliation of the money in and out of the Company’s bank account, as well as an account for transactions in the Directors “credit account. Liquidators ask directors for receipts and evidence to support any claim that the directors may make.
If correct and verified, these amounts can be deducted from the overdrawn directors’ loan account, reducing therefore the balance owed.
Any balance remaining requires an agreement with the liquidator to repay the loan account.