If your company becomes insolvent, everything comes under the microscope. It’s all about identifying what assets can be realised for the benefit of creditors.

In a limited company, the personal liability to repay the company debts is limited, however, that’s not the case when it comes to DLAs as they are personal.

What is a Directors Loan Account?

A DLA is a loan between the company and the individual directors. It is often used essentially as an advance of the dividends the director is expecting to receive at the end of the year.

On the other side of the coin, a DLA can be a loan from the director to the company. The director may advance funds to the company, either for investment or to help remedy any cash flow issues on the horizon.

Directors Loan Account and Tax.

You may have to pay tax on director’s loans. Your company may also have to pay tax if you’re a shareholder as well as a director. Your personal and company tax responsibilities will depend on whether the DLA is overdrawn or in credit.

What happens to your Directors Loan Account when your company is insolvent?

How a DLA is dealt with if a company becomes insolvent depends on whether it is in credit or debit.

If the DLA is in credit, the company has borrowed funds from the director. The director is a creditor of the company. The director will need to register his claim as a creditor with the insolvency practitioner leading the insolvency process.

If the DLA is in debit, the director has borrowed funds from the company. The insolvency practitioner will look to recover the value of the loan as those funds are an asset of the company.

Common mistakes directors make when it comes to Directors Loan Accounts.

Errors can easily be made by directors whether their DLA is in credit or debit.

A common mistake made by directors with DLAs that are in credit is that they prioritise themselves to be repaid their loan ahead of other creditors. Under the Insolvency legislation, this would likely be considered a preference and those funds repaid may well need to be paid back to the company for the benefit of creditors as a whole.

If a DLA is in debit when the company becomes insolvent, the director will be liable to repay their loan. We see two common misconceptions here:

1. The director believes that the loan will simply be ‘written off.’
2. The director fears legal action such as bankruptcy to recover the loan.

It’s the job of the insolvency practitioner (IP) to recover what is owed to the company to maximise potential returns to creditors. Therefore, ‘writing off’ the DLA is highly unlikely.

If a director does not have the funds to repay their loan, they should have an open and honest conversation with the IP. There may be an agreement to reach where part of the loan can be recovered. It is important to note that where a director is in financial difficulty an amicable agreement can almost always be reached without the need for legal action or bankruptcy proceedings.

It is often the case that directors are not aware that they have a DLA at all. Whilst a “retrospective” dividend process may be what they are accustomed to it, being aware of the balance of any DLA is vital for the directors’ personal finances.  

When to seek advice.

If your company is experiencing financial difficulty, pick up the phone to the team at TruSolv. We have been helping businesses for over 30 years with confidential business debt advice. Our team is among the most qualified and experienced in the UK, having helped hundreds of companies get on with the vital business of restructuring, refocusing and recovering.

Call us on 0808 196 8676.