OVERDRAWN DIRECTORS LOAN ACCOUNT
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What is a director's loan account (DLA)?
A director's loan account (DLA) is not an actual bank account as such and can be described as a virtual account that is used by a limited company to record all money transactions passing between the company and its director's.
How is the DLA used?
Loans made to the company by the director – this could be in the form or a repayable loan that is made for the short, medium or long-term to fund company acquisitions or assist with cash flow. The director may also make purchases on behalf of the company and then record the value of the purchase on the DLA as a repayable loan. Loans by the director can be made at any time and without limitation.
Loans made by the director are seen as a credit (monies owing from the company to the director). Effectively, the director becomes an unsecured creditor of the company so long as the company is indebted to the director in such terms.
Loans made to the director by the company - this would usually happen when the director takes money from the company aside from salary and any dividend entitlements arising from distributable profits.
Loans made to the director are seen as a debit (monies owing to the company from the director). Effectively, the director becomes a debtor of the company so long as the loan remains unpaid and at all times is liable to repay the loans.
Other credits and debit transactions – oftentimes a director may take, in addition to a salary, other income from the company and this is treated as a loan and recorded on the DLA. Usually, this loan is then offset against the director’s DLA once the company declares and distributes its profits in the form of dividends (provided the director is a shareholder and entitled to receive dividends). However, if the company has no distributable dividends because it made no profits (or insufficient profit) the loan will remain on the DLA.
A DLA is overdrawn – when the director is indebted to the company after taking account of all credits and debits (as above) and applied to the DLA.
Directors should at all times seek to not have an overdrawn DLA.
When things go wrong…
Insolvency – during any period of a company’s insolvency, or likely insolvency, the directors cannot use the DLA to repay any money that is owed to themselves from the company. To do so would contravene Section 239 of the Insolvency Act 1986 as a preference against the interest of the company’s other creditors.
Also, any loans that the director has taken from the company before or during its insolvency would need to be repaid.
When the company becomes insolvent – the directors are required to repay any money that is owed to the company by themselves. And if the directors received any repayment of loans from the company either just before or during its period of insolvency, these loans will have to be repaid to the company also.
Settling the DLA of an insolvent company – can be very expensive and not without serious consequences. For instance, many directors have been made bankrupt on the petition of the company’s liquidator because they could not afford to settle the company’s DLA. This, in turn, will result in the now bankrupt directors losing their homes and much more by virtue of being made a bankrupt.
Frequently Asked Questions
Q – Can a director settle an overdrawn DLA when the company is insolvent?
A – Yes, certainly, depending on the circumstance.
Q – Can an overdrawn DLA be written off?
A – In some circumstances, an overdrawn DLA can be reduced to a nil balance.
Q – What problems do directors face with an overdrawn DLA?
A – Directors are personally liable for an overdrawn DLA and face personal insolvency or directors disqualification proceedings.
Q – How is interest calculated on an overdrawn DLA if not repaid by the director on time (within 9 months of the company’s year-end)?
Q – What if I cannot repay an overdrawn DLA and the company is insolvent?
A – If you are unable to repay your DLA to an insolvent company there is every likelihood insolvency proceedings will be commenced against you.
What More You Should Know
It is probable that the liquidator, prior appointment to the company as liquidator, will not voluntarily raise the subject of the DLA, or if raised, will not discuss it in any great detail and advise accordingly.
The reason for the liquidator’s silence is to ensure the DLA can be pursued following the liquidator's appointment and the proceeds of which will go towards their fees.
How can we help you?
Over the years we have successfully advised directors on their DLA before, during and after the company’s insolvency. That advice extends to any insolvency or other proceedings taken by the company’s liquidator.
We have saved directors from personal bankruptcy and other adverse outcomes as a result of an overdrawn DLA.
To know more about our service contact us and find out how best we can help you- 0207 504 1300.
*image courtesy of http://www.jagoinvestor.com/
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