A Directors Loan Account is any money that directors owe to their company. It becomes an issue if the company is liquidated.
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- What is a Director’s Loan Account?
- How can a Loan Account be repaid?
- Director’s personal liability after liquidation
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What is a Directors Loan Account?
The Directors Loan Account is the accounting term used to describe money that a Director owes to their company. The money owed may have been leant to a director as a one off lump sum. However it can also build up over time as a result of dividend payments.
In smaller owner director companies the directors may have been advised by their accountant to take regular dividend payments rather than salary. This has the affect of reducing their personal National Insurance liability.
However dividends can only be paid from company profits. If a director draws a dividend when their is no profit this is recorded in the accounts as a Director’s Loan.
The associated director is personally liable to repay any money they owe in their Director’s Loan Account.
How to pay off a Loan Account
Very often a Directors Loan Account will be repaid in the natural course of company trading. As the company moves into profit the directors can elect to use future dividend payments to pay down their loan account.
A company may go through a prolonged period of low profitability. Where this is the case directors can still repay a loan account. This is done by allowing the company to withhold part of their salary and use this to offset against the loan.
Directors Personal Liability for a Loan Account after Liquidation
A Directors Loan Account only really causes an issue for a director if the company is closed. Once a Liquidator is appointed one of their jobs is to collect in any money owed to the company. A director’s loan account falls into this category.
The Liquidator can take legal action against a director to enforce the repayment of a Loan Account. Given this Directors need to give careful consideration to how they will repay this type of debt before deciding to Liquidate a company.
If a director is not in a position to be able to repay their loan account they might decide to avoid Liquidation. They could instead choose to resolve a company debt problem using a CVA. Alternatively they may plan to implement a personal debt management solution after the Liquidation.