Recovery of Overdrawn Director’s Loan Account

Recovery of overdrawn director’s loan account

When a company is making a profit, as a tax saving mechanism, directors are regularly advised by their accountants to receive a small salary from the company and thereafter take drawings from the reserves from the past and current years. From time to time directors will also withdraw money from the company by way of a “director’s loan”, which can be used to finance a major personal purchase such as a deposit for a house. Depending on an individual’s circumstances a director’s loan can also be considered as a tax saving mechanism.

However, the difficulty arises when the company stops making a profit and is subsequently wound up. What happens to the director’s loan?

When (why) would a director need this service?

If your a director of a company, that is either about to be wound up or has already gone into liquidation, and there is an overdrawn directors loan account, then you may wish to obtain legal advice as to what your options are in connection with paying back the overdrawn directions loan account.

Alternatively, if you are being chased by the Liquidator/Administrator for the repayment of the overdrawn directors loan account, you should seek legal advice to see if there is any prospect of challenging the sums sought from you.

How does this process work?

Due to the fact that the director’s loan will be shown in the annual accounts of the company, it is one of the first debts the Liquidator/Administrator will seek to recover.

The process usually starts with the Liquidator/Administrator sending a letter of claim demanding that the sums owed to the company be repaid. If a resolution cannot be reached in respect of the proposed claim the Liquidator/Administrator will normally issue court proceedings in accordance with part 7 of the Civil Procedure Rules.

Can I challenge a claim for recovery of a director’s loan?

You may be able to challenge a claim for the recovery of the director’s loan; however, it can be quite difficult to do so. In many instances a director will seek to reach an amicable resolution with the Liquidator/Administrator.

That being said, we have compiled a list of possible challenges below. However, please note that this list is not exhaustive and you should contact our lawyers so that we can provide you with advice tailored to your circumstances:

That the company’s balance sheet is incorrectly recorded (however beware when using this as a defence as it could give rise to a misfeasance claim against you);
The debt can be offset against monies owed to the director by the company. However, this can only be in exceptional cases due to the mandatory set off provision as set out in Rule 14.25 of the Insolvency Rules 2016;
In instances where the director has given a personal guarantee there may be a possibility that the amount owed in respect of the director’s loan can be set-off and/or substituted against the guarantee. However, the right to subrogate must first be established;
The Liquidator/Administrator is time barred from doing so; and
There has been a procedural or technical error in respect of the proposed claim

If a director wishes to consider his/her options in relation to challenging any potential action, legal advice should be sought at an early stage and preferably even as early as when the director is dealing with the Liquidator or Administrator, by completing questionnaires or attending interviews.

What should people do before calling

If you are contacted by the Liquidator or Administrator, you should explain that you wish to seek legal advice before reverting to them. You should get in touch with us immediately thereafter.

Is it expensive? What are the likely costs?

We will provide you with an estimate of costs at the outset based on the type of work required.

Our lawyers have extensive experience in advising clients who are faced with claims for recovery of a director’s loan and have successfully defended clients who were subjected to such proceedings. Our lawyers will be able to provide you with bespoke and cost effective advice tailored to your circumstances.