Will the director’s loan be written off?

An overdrawn director’s loan account happens when a director withdraws funds from a company, not as salary or dividend, exceeding their invested capital. Essentially, they provide themselves with a personal loan from the company.

Director’s loans are entirely legal and quite common, but repayment is necessary. The overdrawn director’s loan becomes an asset on the company’s balance sheet, and relocating abroad is not an effective means to evade it.


Why could you have an overdrawn director’s loan?

A company director may utilise such loans to address one-time costs or unforeseen bills, offering swift access to funds beyond salary or dividends. 

Approval from shareholders is required for loans exceeding £10,000, though it’s often a formality when the director is also a controlling shareholder.

While it may appear convenient, opting for a director’s loan entails significant administrative work and brings additional risks and tax considerations. Moreover, it can strain the company’s cash flow. Therefore, it is advisable to use it judiciously rather than relying on it as a routine source of income.


What is the right timing to repay a director’s loan?

With an overdrawn director’s loan account, repayment is mandatory. Maintain records of all relevant transfers and amounts, settling the debt within nine months and one day of the company’s financial year-end.

If any balance remains after that period, it incurs a substantial 33.75% Corporation Tax charge. 

While reclaimable upon full loan repayment, the process can be prolonged. HMRC will also impose interest on the outstanding amount for the company.


Are there any consequences if I cannot afford to repay a director’s loan?

Yes, issues can emerge with overdrawn director’s loans if repayment becomes challenging. One solution is to issue a sufficiently sized dividend payment to settle the overdrawn director’s loan account.

Yet, issuing dividends is not possible if the company lacks adequate reserves. This would constitute an unlawful dividend, potentially requiring repayment if the company undergoes insolvent liquidation within two years.

Alternatively, you can raise your salary to cover the loan. In this scenario, the company must be solvent and possess ample resources to cover the salary, along with the PAYE and NICs obligations. 

Failure to meet these conditions, and if the company later faces insolvency, the liquidator can dispute the payment as misfeasance, potentially obliging you to repay the company for the benefit of its creditors.


Is it possible to move abroad to escape an overdrawn director’s loan?

If the company is insolvent and you cannot afford to repay your director’s loan, simply moving abroad is not an effective way to escape it. If you move abroad and your company is still active, the overdrawn director’s loan account will continue to accrue Corporation Tax and interest charges.

Ultimately, HMRC and other creditors will initiate actions to compel the company into liquidation by filing a Winding Up Petition against it.

In a formal liquidation process, the overdrawn director’s loan account is regarded as a company asset. If the owed amount is substantial, the liquidator will anticipate repayment of the loan to enhance returns for the creditors.

If repayment is unattainable, you might need to sell personal assets or explore personal insolvency procedures, such as an IVA or bankruptcy.

In the event of a court-ordered winding-up of the company, the liquidator will scrutinise the directors’ conduct. Discovering attempts to evade debts or other instances of director misconduct could lead to severe consequences.


How can voluntary liquidation help you in an overdrawn director’s loan account? 

If faced with an overdrawn director’s loan account that is challenging to settle and considering a move abroad, it’s prudent to address loose ends before departure. 

One option is to voluntarily close the company through a process called Creditors’ Voluntary Liquidation (CVL).

While a CVL won’t eliminate the director’s loan, appointing a liquidator allows collaboration to determine a feasible repayment based on your financial capacity. It’s essential to note that, once again, the liquidator is legally obligated to scrutinise your directorial conduct.

Nevertheless, opting for voluntary liquidation and prioritising creditors’ interests in this scenario can mitigate the risks of adverse consequences for you personally.


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Seek professional guidance with Vanguard Insolvency! 

Overdrawn director’s loans can be complex, and relocating abroad without settling your debt will only complicate matters. 

If you are concerned about the implications of a challenging director’s loan repayment, reach out to our licensed insolvency practitioners for a free, same-day consultation with no obligation.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.