After a pre pack and subsequent company liquidation, the director is personally liable for to repay an outstanding Directors Loan Account.
Included in this article:
- What happens to a directors loan account after a Pre Pack?
- Options for repaying a directors loan account
- Is a CVA a better solution if there is a directors loan account?
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What happens to a Directors Loan Account after a Pre Pack?
Pre pack liquidation involves starting a new company to trade in place of an old one which is failing because of its debts.
The failing company’s assets are sold to the new business. The old company is then liquidated. As far as the directors are concerned most of the old debts are written off.
However the liquidator is still obliged to collect in any money owed to the old company. This includes any overdrawn Directors Loan Account (DLA) balance. The director is personally liable to repay this debt to the liquidator.
You may not be aware that you have a DLA. They can commonly build up if you have withdrawn dividends when the company had no profit to pay them.
A liquidator has the right to take legal action against you to recover the overdrawn directors loan account if necessary.
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Options for Repaying a Directors Loan Account
The existence of a Directors Loan Account does not mean that the option of a Pre Pack should be dismissed. However as a director you will need to anticipate your liability for this debt. You will need to plan a repayment strategy.
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. The liquidator will often be prepared to accept less than the amount owed if a cash lump sum can be made available.
If you will struggle to repay a directors loan account you could use a personal debt solution to manage your liability for this debt.
Is a CVA a better solution if there is a Director’s Loan Account?
There may be simply no way for you to repay your outstanding directors loan Account. Perhaps you have absolutely no funds to negotiate a settlement and an IVA or bankruptcy is not an option.
In these circumstances you may have to disregard the Pre Pack and then liquidation option altogether. An alternative company rescue solution to consider in these circumstances is a CVA (Company Voluntary Arrangement).
The advantage of a CVA is that the original company is not closed. It continues to trade normally. Repayment of the directors loan account can then be managed over time.
Need advice about a directors loan account? Give us a call (0800 180 8440) or complete the form below to speak to one of our experts.