Can’t Repay Your Director’s Loan Account (DLA)?

A director’s loan account (or DLA) is simply a record of all transactions between a director and their business. Any money taken or given outside of your normal salary contributes to this. Your DLA can be in debit or credit depending on how much you have given and/or taken.

The directors and the business are two separate entities and therefore, a company bank account cannot be treated like a personal one. This often-misunderstood distinction is where most of the issues arise. Directors’ loans usually are not an issue until a company enters liquidation. At this point, tax implications and personal liability can make a DLA a major problem.

Overdrawn Director’s Loan Account

At one point, director’s loans were relatively unregulated however, in recent years HMRC have been policing them more closely. As a result, there are strict rules and guidelines regarding how directors should manage their DLA.

You have 9 months from the end of your business’ accounting year to repay your DLA. After this period, a DLA becomes ‘overdrawn’. This does not mean you have to pay it back, but you will start to incur tax penalties.

If the loan is more than £10,000 you will be required to pay income tax and national insurance. Your business will also have to pay corporation tax. This is part of the reason that the totals owed for directors’ loan accounts can be surprising. Over many years a DLA can accumulate a large tax bill on top of the original amount.

What Happens to a Director’s Loan Account During Insolvency?

In the event of formal insolvency such as liquidation or administration, your DLA will be viewed as an asset of the company. In this case, the insolvency practitioner overseeing the process will work to recover this debt.

This means that you will be personally pursued for the full amount, with the potential for additional cost, fees and interest to be added. This means you could end up being forced to pay far more than you originally anticipated. It is relatively common for the final bill to be more than double the amount ‘actually owed’.

During the insolvency process, the insolvency practitioner can pursue you through:

• Issuing Statutory Demands.
• Repossession of your home and assets.
• Bankruptcy.
• Charges on property and assets.
• County Court Judgements.

All these methods put your personal finances and assets, including your home, at risk. This is why it is important to act quickly and get expert advice to resolve any overdrawn directors’ loan account issue.

The Legal Consequences of a Director’s Loan Account

Although a directors’ loan account is not illegal, it can carry legal consequences for directors. Often when a company enters liquidation, its financial management and the conduct of directors will be investigated.

This investigation will look at whether you took money from the company when it was insolvent, or whether your actions contributed to the failure of the company. If you did not conduct yourself correctly, you can be made liable for company debts, be disqualified/banned as a director or even face criminal charges.