What happens to my director's loan account in liquidation?

What is a director's loan account?

It is the running record of money moving between you and the company outside salary and properly declared dividends: expenses paid personally, cash drawn, personal costs put through the company.

Overdrawn means you have taken more out than you have put in, so you owe the company. In credit means the opposite.

What does a liquidator do about an overdrawn account?

1. Reconstruct the account from the company's records and bank statements.
2. Write to you with the figure they say is due.
3. Ask for repayment, in a lump sum or by instalments.
4. Take recovery action if no agreement is reached, since the debt is an asset of the estate.

Liquidators are expected to pursue realisable assets. It is not personal, and it is not discretionary in the way directors sometimes assume.

What about dividends that turn out to be unlawful?

Dividends can only be paid out of distributable profits. Where a company was not profitable, dividends declared may be unlawful, and the amounts can be re-characterised as drawings, which increases an overdrawn loan account.

This is one of the most common surprises in owner-managed liquidations, so it should be checked before liquidation rather than discovered during it.

What should I check before anything starts?

• The latest loan account balance in the accounts, and how current it is.
• Whether dividends declared were supported by profits at the time.
• Whether expenses you paid personally have all been recorded.
• Whether you have a realistic repayment proposal if the account is overdrawn.