The majority of businesses operate a director’s loan account (“DLA”) to enable a director to extract credit from the Company which is not a problem during the normal trading of a solvent Company. DLAs can also be used to allocate expenditure by the Company for the benefit of directors and vice versa.

However, issues arise when funds are drawn against the DLA to facilitate a monthly salary to avoid tax or declaring the payments as dividends. The largest issue arising from DLAs is when credit is taken from the Company when it has no distributable reserves to enable a dividend and/or is insolvent.

When entering an insolvency process an overdrawn DLA will be treated as an asset of the Company to be realised by the appointed insolvency practitioner who will ask for it to be repaid in full.

When a director is faced with this request for payment there is very little they can do to dispute the debt. DLAs generally feature in the Company’s accounts, which the directors sign to validate their contents. 

Disputing the debt via the Courts will likely have little impact as the stance of “ignorance” of how the Company accounts are made up is not a valid defence for a director in Court. A director may be able to argue that some of the debits against the DLA were not personal expenses and were legitimate business expenses or expenses incurred in the carrying out of the role as director. Whilst this will require a more forensic analysis of the account entries and is likely to result in a significant amount of time being incurred by the insolvency practitioner it is likely to end up with a similar result although the amount may be reduced.

In short, the best option for a director is to speak frankly with the insolvency practitioner and seek to reach an agreement on a repayment figure and potential repayment plan. Most insolvency practitioners are experienced enough to realise that many directors have little in the way of liquid funds by the time their Company has failed. Instead most insolvency practitioners would be more inclined to reach an agreement to settle the overdrawn DLA in a timely manner and move on to deal with other matters.

Don’t bury your head in the sand. Insolvency practitioners are practical people who deal pragmatically with issues on a daily basis. 

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