A director’s loan account (DLA) is a record of financial transactions between a director and the company. When a company goes into liquidation, this loan must be taken into account by the liquidator as part of the company’s assets.
Some directors are unaware of their DLA circumstances, and in some cases, don’t know what their legal duties are for their DLA during liquidation. As experienced insolvency practitioners, we have helped many directors understand their loan account and what an outstanding balance could mean for your company during liquidation.

What is a director’s loan account?

A director’s loan account is a financial record that tracks any money a director takes out or puts into the business which is not salary, dividends, or expense repayments. Examples of transactions that would be included in a DLA are:

• Personally paying for company expenses.
• Withdrawing money for personal use.
• Lending money to the company.
• Paying personal bills using the company account.

What does it mean to be in credit or overdrawn?

Depending on whether the amount you owe the company is more than you’ve contributed, or vice versa, your DLA will either be considered overdrawn or in credit.
An in credit DLA means that the money you have paid into the company are greater than your withdrawals, meaning the company owes you the difference.
An overdrawn DLA means that your withdrawals equal more than what you’ve paid into the company, meaning you owe the company the difference.

DLA Tax

An overdrawn DLA may have tax consequences if the total amount due is not repaid in a set timeframe. If an overdrawn director’s loan remains outstanding 9 months and 1 day after the end of the company’s Corporation Tax accounting period, the company will generally have to pay a Section 455 tax charge of 33.75% on the outstanding amount.
This tax does not reduce the amount the director owes to the company. However, if the loan is later repaid or written off, the company may be able to reclaim the Section 455 tax from HMRC, although there can be a delay before the refund becomes available.
Separate tax consequences can also arise where a director owes more than £10,000 and pays no interest, or interest below HMRC’s official rate.
You can learn more about the Section 455 tax on the Government website.

What happens to an overdrawn DLA during liquidation?

Regardless of if your company is closing solvently or insolvently, an outstanding DLA is treated as a company asset. The appointed liquidator will have a legal duty to recover these funds wherever possible, and the loan will not be ignored because the business is closing.
How a DLA is settled will be different depending on whether the company is solvent or insolvent.

Solvent Companies

If the company is solvent, an overdrawn DLA can usually be offset by the director’s capital entitlement if they are also a shareholder. Alternatively, the director can repay the DLA separately and then receive their full capital distribution.
In either case, the DLA is settled. The difference is whether the director repays it directly or it is offset against the amount they are due.
If you are going through a Members Voluntary Liquidation, the Liquidator will apply to HMRC to recover any S455 tax previously paid on this loan before it was settled.  Any refunds will then be distributed to the shareholders on receipt.

Insolvent Companies

If the company is insolvent, the appointed liquidator will seek repayment for the owed monies. This may be paid in full, through an agreed repayment plan, or settlement depending on what is in the best interests of the creditors.
The Liquidator will ask you to complete a Statement of Means which will allow the Liquidator to assess the level of your assets and liabilities and also take into account your monthly incoming and outgoings, to determine whether you have the ability to repay all or part of the loan and what a fair payment would be.
To learn more about the types of liquidation and what they mean for business, read our article on what happens when a company goes into liquidation here.

Is being unable to repay a DLA considered misconduct?

No, being unable to pay an outstanding DLA is not necessarily considered misconduct. However, it may prompt further investigation if loans were taken in certain circumstances:

• The director continued taking money from the company when they knew, or ought to have known, it was insolvent or unable to pay creditors.
• Withdrawing from the company account for personal use instead of paying creditors.
• Account records were incomplete or inaccurate.
• Large or repeated withdrawals were made without a realistic plan for repayment.

These circumstances showcase the importance of accurate account keeping and staying aware of the status of your director’s loan account. To prevent potential complications with your DLA during liquidation, as a director you should:

• Keep accurate, detailed records of your company’s accounts.
• Understand if your DLA is overdrawn or in credit.
• Avoid further withdrawals if the company is struggling financially.
• Speak to an insolvency practitioner to find a workable solution for any unpaid debts.

If you’re unsure of the status of your DLA, our experienced insolvency practitioners can help. We’ve supported business directors across the UK with company liquidation, let us support yours. Arrange a free, no-obligation chat with one of our licensed practitioners at Revive Business Recovery.