What happens after a company liquidation and what are the implications for the Directors of the business that's been closed?
What is a Director’s Loan?
One of the fringe benefits of being the director of a private limited company is the ability to take money out of that company (separate to wages and dividends) in the form of a short-term interest-free loan. While there are strict tax rules governing the use and misuse of a Director’s loan account (DLA), used responsibly and properly they can be a convenient way to finance larger purchases without paying bank rates, or to get an advance on expected dividend payments. However, it’s important to remember that, like any loan, it must be paid back.
Director’s Loans when a company is liquidated
One of the main advantages of incorporating a business rather than running it as a sole trader or partnership is the legal separation of director and company from one another’s liabilities.
While a Director is an owner of the company, the company is a distinct legal entity in its own right. Money loaned, even to the owner, must be recovered just as it would with any other debtor.
If a company is liquidated with an outstanding balance due from the Directors then the liquidators have a duty to recover these funds.
The recovery process could result in the company, via its liquidators, taking legal action against the directors. In extreme cases, bankruptcy and sale of personal assets could follow if the director is unable to pay.
Overdrawn Director’s Loan and Businesses in Jeopardy?
If you’ve drawn money from your business as a Director’s loan and your business is under financial pressure or in danger of being liquidated, it’s important to seek help fast.
At Lines Henry, we understand that there’s never a good time for your business to be experiencing financial difficulty. This especially so if the directors are worried about how they are going to repay monies that they have borrowed from the company.
There are a range of options which can be employed to assist with either business recovery or giving all parties a better outcome if liquidation is inevitable. As in all circumstances, the earlier we’re consulted, the more options will be available.
Speak to us, we can help.