A guide, not advice. This explains how things generally work. A licensed insolvency practitioner will tell you what applies to your company or to you.
What Is an Overdrawn Director's Loan Account?
A director's loan account (DLA) records money taken out of the company by a director beyond salary and dividends - effectively a loan from the company to the director. If the account is "overdrawn" at the date of liquidation - meaning the director has taken out more than they are entitled to - the liquidator will treat that balance as a debt owed by the director personally to the company.
This is one of the most common sources of personal liability for directors in liquidation, and it often comes as a surprise.
How It Happens
Overdrawn DLAs build up in several ways:
- Taking money out of the company without declaring a dividend or salary
- Personal expenses paid by the company
- Drawing dividends when there are insufficient retained profits to support them
- Loan repayments or advances not properly documented
What the Liquidator Will Do
The liquidator will review the DLA as part of the standard investigation. If it is overdrawn, they will:
- Confirm the balance with you and the company's records
- Request repayment - often seeking a lump sum or a repayment plan
- If you cannot agree, pursue the debt through the courts as a last resort
Repaying an overdrawn DLA is a personal obligation. It is not written off by the company's liquidation.
How to Protect Yourself
- Keep accurate, up-to-date DLA records
- Ensure all drawings are properly documented as salary, dividends, or expenses
- Avoid drawing dividends when there are no profits to support them
- Take advice before liquidation - in some cases, steps can be taken to reduce or manage an overdrawn balance
The Tax Angle
An overdrawn DLA can also trigger tax consequences. Under the company loans rules (commonly known as Section 455), the company may have to pay tax on the loan, repayable when the loan is repaid or written off. In liquidation, write-off can create an income tax liability for the director.
Speak to a Licensed IP
If you think your DLA may be overdrawn, taking advice early can make a real difference. Our Manchester-based practitioners will review your position and explain your options - confidentially and without judgment.