Director Loan Accounts (“DLAs”) form part of a company’s financial records and detail any transaction between the company and its directors.

This is consistent with basic accounting standards and legislation which requires that all company transactions are recorded.

Any drawings of company monies which are made by a director and that are not salary, dividends, legitimate expenses or genuine reimbursements are repayable to the company in the form of a loan (known as an “overdrawn loan account”) and vice versa if a director pays monies into a company. In the absence of any other form of agreement, that loan is repayable on demand.

These accounts should be collated and included in the company’s year-end accounts to be made publicly available on Companies House.

Common Misconceptions

While there are certain statutory requirements contained in the Companies Act 2006 (such as section 197(1), section 213(2), and section 213(3)(b)) guiding how such transactions and director’s loans ought to be authorised and handled in accordance with a company’s articles of association, any non-legitimate and/or unallocated company drawings may still be regarded as forming part of an overdrawn loan account. Given that the point of the DLA is to keep track of all transactions involving directors and anything outside of the exceptions (namely, salary, dividends, and legitimate expenses/reimbursements) the DLA will be scrutinised if a company enters into any form of insolvency process.

In the event of an insolvency, former directors are still liable to the company for their overdrawn DLA even if they have resigned or their appointment has been terminated, provided no limitation periods have lapsed. In some instances, this may include company payments made to those closely associated with a director, such as their family, friends, or business partners (even though such transactions may amount to a transaction at an undervalue).

Similarly, if one director’s overdrawn loan account contravenes the provisions in the Companies Act, as in Neville (as administrator of Unigreg Ltd) and Anor v Krikorian and Ors [2006] EWCA Civ 943, any other director with knowledge of the DLA may be jointly and severally liable for its repayment if it can be shown that they failed to take steps to recover the debt. It is no defence to this claim that the second director was unaware that the DLA was overdrawn. The failure to repay or seek repayment of an overdrawn DLA may amount to a breach of a director’s fiduciary duties, and specifically their obligation to act independently and in the company’s best interest.

Directors should also be live to the tax implications of DLAs, the consequences of the presence of an overdrawn loan account if a company becomes insolvent, and the fact that such loans can amount to grounds for director disqualification.

Tax Considerations

HMRC sets certain rules for DLAs above £10,000 in so far as interest and/or benefit in kind considerations are concerned.

Administrator/Liquidators’ Claims

Officeholders including administrators and liquidators have a statutory obligation to investigate the company’s books and records to realise any outstanding debts. Transactions which fall outside the normal course of business and involve a director’s drawings from the company will likely be scrutinised.

Consequently, any outstanding overdrawn loans are recoverable debts that an administrator or liquidator can either pursue or assign such debt for the benefit of a third-party (such as litigation funders). Therefore, in the context of an insolvency, DLAs can be relatively challenging for directors of a company in liquidation if the overdrawn loan account has accumulated over several years and the director is also struggling financially. Successful legal claims could lead to a director’s bankruptcy if the director is unable to pay their debts as they fall due (as per section 267 of the Insolvency Act 1986).

Director’s Disqualification

Under the Company Director Disqualification Act 1986, the Insolvency Service may pursue a court order or request that a director admit to their unfit conduct and voluntarily undertake to uphold their disqualification. The order or undertaking will set out the length of disqualification, along with any additional restrictions beyond the usual prohibition against acting as a director or managing any UK company.

Obtaining Legal Advice

The Restructuring & Insolvency Team at Edwin Coe has considerable experience in advising on DLAs, director’s duties, and the director disqualification process. Contact our team of specialist professionals today for tailored advice based on your specific issues.