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.