Directors Loan Accounts (DLA) (Overdrawn)

Directors Loan Accounts (DLA) (Overdrawn): Personal Debt to a Failing Company
As a director of a UK company, you might, at times, draw funds from the company or put money into it. These transactions are typically recorded in a Directors Loan Account (DLA). While a DLA can be a legitimate way to manage funds, an Overdrawn Directors Loan Account becomes a critical issue, especially if the company enters Compulsory Liquidation. In such a scenario, the Liquidator will demand repayment of any sums owed by the director to the company, as this represents an asset of the company available to its creditors.

In my long career, having dealt with insolvency related cases for over 36 years, I’ve observed that overdrawn DLAs are one of the most common avenues for Liquidators to pursue personal recovery from directors. Often, directors mistakenly believe the company’s money is their own, leading to significant personal liability.

What is an Overdrawn Directors Loan Account?
A Directors Loan Account (DLA) is essentially an internal record of money owed to the director by the company (a credit balance) or money owed by the director to the company (a debit or overdrawn balance).

An Overdrawn DLA arises when a director takes more money out of the company (through drawings, personal expenses paid by the company, or unapproved benefits) than they have put in, or more than they are legitimately owed (e.g., through salary or expense reimbursements).

Common reasons for an Overdrawn DLA include:

• Drawing funds without formal salary/dividend declaration: Taking money out as needed, without properly processing it as a salary (subject to PAYE/NI) or a lawful dividend (subject to distributable profits).
• Personal expenses paid by the company: Using company funds or credit cards for personal purchases that are not legitimate business expenses.
• Unrecorded loans: Taking a loan from the company but not documenting it properly or ensuring it is repayable on demand.
• Poor financial management: A general lack of distinction between company funds and personal funds.

Why an Overdrawn DLA is a Problem in Compulsory Liquidation
When a company enters Compulsory Liquidation, the Liquidator’s primary duty is to identify and realise all of the company’s assets to repay its creditors. An Overdrawn DLA represents a debt owed to the company by the director, and therefore, it is considered an asset of the company.

The Liquidator will meticulously examine the company’s financial records, bank statements, and the DLA itself to determine the extent of the overdrawn balance. They will then demand repayment of this debt from the director personally. This is often one of the quickest and most straightforward ways for a Liquidator to recover funds for the insolvent estate.

Failure to repay an overdrawn DLA on demand will result in legal action by the Liquidator, including issuing statutory demands and, if necessary, commencing bankruptcy proceedings against the director personally.

Consequences for Directors
The consequences of an Overdrawn DLA when a company enters Compulsory Liquidation are significant:

• Personal Liability for Repayment: The director is personally liable to repay the full overdrawn balance to the Liquidator, along with interest. This can be a substantial sum.
• Director Disqualification: While not automatically leading to disqualification, a significant overdrawn DLA, especially if it contributed to the company’s insolvency or if the director fails to cooperate in its repayment, can be a factor considered by the Official Receiver or Liquidator in assessing fitness to act as a director. It can be viewed as misfeasance or a breach of director duty.
• Bankruptcy Proceedings: If the director cannot or will not repay the overdrawn DLA, the Liquidator may petition for the director’s personal bankruptcy.
• Tax Implications: Overdrawn DLAs can have significant tax consequences, as HMRC may treat them as benefits in kind or undeclared income.
• Reputational Damage: The public nature of insolvency proceedings and recovery actions can damage a director’s reputation.

My Guidance: Keep Personal and Company Finances Separate
The golden rule for directors is to maintain a clear distinction between your personal finances and those of the company. Regularly monitor your DLA and ensure any withdrawals are legitimate and properly accounted for as salary, expenses, or lawful dividends.

I can assist you by:

• Assessing Your DLA: Reviewing your Directors Loan Account to determine the current balance and potential exposure.
• Understanding Your Obligations: Clarifying your director duties concerning company funds and avoiding an overdrawn DLA.
• Negotiating Repayment: Assisting in discussions with the Liquidator regarding repayment terms, or challenging the claim if appropriate.
• Navigating Investigations: Guiding you through the investigative process related to your DLA.
• Mitigating Risk: Advising on steps to take to minimise potential personal liability and director disqualification.
• Providing Crucial Support: Offering straight talking, supportive guidance during what is undoubtedly a highly stressful and challenging time.

Do not treat the company’s bank account as your personal piggy bank. This is one of the most common pitfalls I see.

If you want to find out anything further about this topic then please feel free to call me on 0330 236 9937 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com.

This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.