Overdrawn Directors Loan Accounts

For a number of years now it has become increasingly common for liquidators of limited companies to have to deal with the question of overdrawn directors loan accounts. These occur where the directors have taken round sum amounts out of a business in the expectation that the business would make enough profit and that these withdrawals would be covered by the declaration of a dividend. However, if there is not enough profit to cover the amounts taken out then the shortfall is repayable. I saw a director who had a small consultancy company working in security. The company owed HM Revenue & Customs £20,000 and the Bank £40,000. He had not personally guaranteed the bank debt. He owed the company £50,000. In simple terms, he had borrowed from the bank and HM Revenue & Customs to pay himself.

He came to see me having already been to see his accountant. The accountant had suggested that he vote himself a bonus to cover the amount he owed. The amount of bonus necessary would have been about £80,000 to cover the amount outstanding including tax and national insurance. The problem with this so-called solution was that it would leave him open to an action by the liquidator for recovery of the bonus as it could not be justified as a proper expense of the company. This was especially the case as the turnover of the business was only £60,000 a year! He was proposing to vote himself a bonus that was the equivalent of 16 months trading.

Unfortunately, the hardest part of our job is giving people the best option long term, not a quick fix that will undoubtedly end up in bigger problems down the line. It is our responsibility to give people the best solution for them which is not always the easiest option, in the case above we had to give the client some hard truths to ethically give them the best advice.