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Directors of limited companies frequently draw  money from their companies’ bank accounts without recording whether the money has been drawn as salary or a dividend in respect of their shares or repayment of money previously lent to the company by the director.

When money is withdrawn from the company in this way it is treated for accounting purposes as a loan by the company to the directors who have used the money.  If the directors are not owed any money by the company this will result in the directors having an ‘overdrawn’ directors’ loan account.  This means that the company is entitled to reclaim on demand the amount you as a director have ‘borrowed’ but not yet repaid to the company.  Put simply you have created a debt which is owed to the company just like any other debt owed by a customer of the company.

Directors Loan Accounts and Insolvency

For companies which are trading profitably there is not normally a tax issue with regard to overdrawn directors' loan accounts. Provided that the directors' loan accounts are not overdrawn 9 months beyond the company's accounting year end there will not be a tax problem. However if the directors' loan account remains overdrawn beyond this period HMRC will charge a penal rate of tax on the overdrawn amount.

The repayment of the loan accounts for solvent companies is normally dealt with by arranging for a dividend to be declared with regard to the shareholdings of the directors concerned and tax is then paid in the normal way on the dividend by the company and by the director personally.

When a company faces insolvency the directors may find it is difficult or impossible to pay a dividend as the company may not have earned sufficient profits which are needed to justify being able to declare and pay a dividend.

Repayment of Directors' Loan Accounts after Insolvency

Once a company has entered into liquidation the insolvency practitioner who is appointed as the company's liquidator must investigate the financial conduct of its directors with regard to the company. The liquidator will always review how the company's directors have been paid and cannot ignore an overdrawn director's loan account. The overdrawn account is an asset of the company and the liquidator must take reasonable steps to recover the overdrawn amount for the benefit of the creditors of the company who have lost money.

For free confidential advice and assistance concerning Directors' overdrawn loan accounts call now on 0800 7710 073 and speak to a licensed insolvency practitioner. We have many years experience of advising directors who face issues such as this and we can provide professional and practical help and advice for you.

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