Directors Loan Account and Pre Pack

A Pre Pack can be an ideal solution for rescuing a struggling business. However if there is an outstanding Directors Loan Account the associated directors remain personally liable for this.

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What happens to a Directors Loan Account in a Pre Pack?

A Pre Pack results in the Liquidation of the old company. One of the duties of the appointed Liquidator is then to collect any debts owed to the company. This includes Directors Loan Accounts.

A Directors Loan occurs if the directors have borrowed from the company. This borrowing may not have been in the form of a specific loan. Commonly the account builds up if directors have withdrawn dividends when the company had no profit to pay them.

A Liquidator has the right to take legal action against directors to recover outstanding loan accounts if necessary. This action could in turn force the directors into a position of personal insolvency.

Options for Repaying a Directors Loan Account

The existence of a Directors Loan Account does not mean that a Pre Pack will be unsuitable. However the directors will need to anticipate their personal liability for the debt. As such they must ensure they plan a repayment strategy in advance.

One option is to simply agree staged payments with the Liquidator. Most liquidators will be open to receiving monthly or quarterly payments towards the debt. Alternatively it is common to agree a lump sum settlement with the Liquidator. They may be prepared to accept 50% of less of the amount owed if a cash lump sum can be made available.

If the director is struggling to make a suitable repayment agreement they could then consider implementing a personal debt solution. In fact it is quite common for a company debt solution such as a Pre Pack to be implemented hand in hand with an IVA which then protects the directors.

Consider using a CVA (Company Voluntary Arrangement)

In unusual circumstances there may be simply no way the Directors can resolve their outstanding Loan Accounts. Perhaps they have absolutely no funds to negotiate a settlement and an IVA or bankruptcy is not an option. In these circumstances they may have to disregard the Pre Pack option altogether.

The alternative debt solution which can then be considered is a Company Voluntary Arrangement (CVA). The advantage of this is that it does not involve liquidation. The company continues to trade normally under the management of the original directors.

The officers of the company still have a duty to repay debts that they owe to the business. However this can be managed over time by off setting wage payments against the debt.

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