Overdrawn loan accounts for directors can be a real problem, especially when a company is going bankrupt. Having a better understanding of the overdrawn directors’ loan accounts can be helpful in this case.
Here is a closer look at the topic, but if you have more in-depth questions about directors’ loan accounts that are overdrawn.
What is a loan account for the directors?
A director can basically withdraw money from their company without it having anything to do with dividends or payroll by using a director’s loan account. A director’s loan account is at zero when there is no money taken out of the company. The account will be in the black when a director invests their own money in a business to cover expenses or costs associated with the acquisition of specific assets.
Going Overdrawn
Since they differ significantly from the way money is lent from business accounts in the case of sole traders or self-employed businesses, director’s loan accounts are typically examined by a number of interested parties. This is particularly true if a bank account has a sizable overdraft or if a relevant business is experiencing any sort of financial difficulty.
An overdrawn director’s loan account is when a director has taken more money out of a company than they have put in, not counting dividends or salaries. On the balance sheets of the companies involved, these amounts are seen as assets until they are paid back.
Tax issues
Being overdrawn in this way isn’t always a problem for a company or a reason for directors to worry, as long as all relevant transfers are recorded and amounts owed are paid off within nine months of the end of the company’s financial year.
If not paid, one can even try overdrawn directors loan account liquidation in order to recover the loan amount.
Insolvency
An overdrawn director’s loan account will be seen as an asset to be pursued by liquidators who are hired in the event of a company going bankrupt in order to pay off as many of the business’s debts as they can. Therefore, if a director has taken the money out of their company other than through dividends or borrowings, they will be required to repay it to the creditors of the business. Naturally, this may have a negative impact on the directors’ personal financial situation if their company is being liquidated.
A Common Problem
Using a director loan account is common and doesn’t cause any problems as long as the right records are kept and the director can pay back the money when they need to. In real life, however, loan accounts are often not taken seriously enough as a possible source of money problems.
Often, a director will take money out of his or her company when things are going well, but then find it hard to pay it back when things go wrong. This happens so often that between 75% and 80% of business bankruptcies are caused by director loan accounts that are overdrawn.
Hence, put some charges like overdrawn directors loan account interest on the amount withdrawn if not given or paid back in a certain time.
Director Loan Accounts That Are Overdue Are Written Off
A company may opt to write off a director’s debt as an overdraft loan balance. However, it’s not always the end of the story, particularly if liquidators have been hired to extract as much cash as they can from a failing company. Even though the company had already written off the debt in this case, the liquidator would likely pursue the director for the money.
Sometimes a liquidator will decide that the sums owed by directors to a company are so small that they are not worth pursuing. But that will depend on the amount of money involved.
Get good advice
Overdrawn director loan accounts can be a problem, especially when a company is going bankrupt, because of a number of things, not the least of which are the possible overdrawn directors loan tax consequences. So, no matter what your situation or worries are, it is important to get the best advice and direction on the most important things as soon as possible.
