What happens when you cannot pay an overdrawn Directors Loan Account?

Liquidators negotiate with Directors over many different things but what happens when you cannot pay an overdrawn Directors Loan Account.  

A Director’s loan account that is overdrawn is an asset of the company. It is essentially no different from being overdrawn with the bank. The difference is instead of owing the bank, you owe the company.

A Liquidator has a duty to realise and distribute the assets of a company in Liquidation. That duty arises from both regulation and legislation. Statement of Insolvency Practice Number 2 says:

In every case, an office holder should make an initial assessment as to whether there could be any matters that might lead to recoveries for the estate and what further investigations may be appropriate.

Once a Liquidator’s investigations have discovered a Director’s loan account is overdrawn they have to request it is paid back given it is an asset.

If you cannot pay an overdrawn Director’s loan account then we appreciate that this can be very worrying. A potential outcome of this is Bankruptcy. However, you can negotiate but it is important to note that alongside a fair and reasonable process, there is also a duty to maximise realisations for creditors. 

For a Liquidator to pursue an overdrawn Director’s loan account that is not repaid, they will usually need to instruct solicitors who will typically look to issue a Statutory Demand for payment. Alternatively, the Liquidator’s solicitors may issue legal proceedings with a view to obtaining Judgment. Both approaches will mean the Liquidator is incurring legal costs to take the matter forward. If the company in Liquidation is without any available assets to fund such proceedings then the Liquidator may have to consider funding them out of their own pocket or perhaps through a funding arrangement with their lawyers. This means that an Insolvency Practitioner will usually want to be sure a Director has the ability to pay before embarking upon litigation.

If you do not pay the overdrawn Director’s loan account for any reason then the Liquidator has to take action to attempt to recover it. The Liquidator has to be able to justify any action (or inaction) that he or she takes. If you simply cannot pay it, either now or in the future the Liquidator can still pursue you for it but to do so would be pointless and expensive.

Your ability to negotiate with a Liquidator could be so important to you and your family. If your overdrawn balance is substantial but the only way to repay is through the sale of your family home then the Liquidator may additionally need to issue extra proceedings to force the sale. In such cases it will also typically involve the Director’s partner who may have a 50% interest in the property which is likely to negotiate the repayable balance down. 

Simply informing a Liquidator you do not have the ability to repay your overdrawn loan account back might not be sufficient. However, one way you could consider satisfying the Liquidator that you cannot pay an overdrawn Director’s loan account is to provide what is called a Statement of Means. A Statement of Means is a document that details a person’s assets, liabilities, income and expenditure. It can be supported by documents to back up the major figures disclosed. This shows you have nothing to hide.

If you are worried about your Overdrawn Director Loan Account or have a client that may be facing this challenge, then do not hesitate to put them in touch with us at Lucas Ross - Business Rescue, Recovery & Insolvency.