Overdrawn Director’s Loan Account
As we enter a post-COVID-19 economy, the Government has removed restrictions on insolvency. As a result, company liquidations are on the rise, having recently doubled in one month alone. Director’s Loan Account issues usually arise if a company is liquidated and you as a director have:
- Not had a chance to get to the year-end, when typically, dividends are used to eradicate any overdrawn account
- Dividends have been continually taken from the business even though it is struggling financially
- A director has used company accounts as an extension of their own
Liquidation, or any form of corporate insolvency, becomes the ‘point of crystallisation’ in terms of the company’s financial status at that point. The DLA then is accounted for in either a Statement of Affairs or a closing Balance Sheet for the failed company.
At that point whatever balance shows on an overdrawn Director’s Loan Account, is a debtor in the liquidation. The liquidator will see it as an asset of the business and look to recover it, through whatever means are required.
We are now finding many instances where liquidators and their legal advisers are using what is known as ‘Litigation Funding’ as part of their process to recover what they see as due to the failed company and very often is seen as the ‘lowest hanging fruit’.
This is a very dangerous development in this field and Directors must be aware of the consequences of not dealing with any overdrawn DLA, as quickly as possible, to look to avoid what can be exorbitant costs as a result of legal action.
Poor accounting records, known as incomplete records, leave any Director’s Loan Account open to scrutiny and/or perception as to what the balance actually is.
In a number of instances, we have seen a Director’s Loan Account prepared by a liquidator which is completely in their favour – with little or no regard to funds or expenses the director may have introduced, along the way.
If the liquidator believes the Director is not financially astute to realise the situation, they will look to ‘railroad’ the Director and that’s where Bell & Company come in. We understand the full ramifications of:
- The accountancy position and corrections if required to a Director’s Loan Account,
- The liquidator’s stance and tactics taken, and
- Where possible the negotiation process to settle such things.
A couple other points to note in this brief summary on overdrawn Director’s Loan Accounts:
- Illegal dividends: If as part of their review the liquidator believes that the accounting records were incorrect and profits are wrong and overstated, then they will look to recover what are deemed to be illegal dividends.
In simple terms the company must have made enough money to allow dividends to be taken. This can be very subjective and again with the backdrop of litigation funding is a dangerous area for Directors when companies have gone into liquidation.
- It’s the accountant’s fault! We very often hear this remark and, in some instances, yes you may have been let down by your advisor but it’s your responsibility to maintain the correct financial affairs for your company, including how you have withdrawn funds from the company
Very often directors use their accountants conduct as a scapegoat to try and resolve issues, but this tactic invariably fails.
As is always the case with SME debt it is vital to be realistic, pragmatic and to degree accepting of the reality of the situation. As we often say… ‘know the worst but achieve the best’
We at Bell & Company are experienced in this very specialised niche and can help offering the best advice when a Director is faced with claims by a liquidator for an overdrawn Director’s Loan Account.