Why am I being contacted about an overdrawn directors loan account (DLA), I didn’t take a loan from my company?

When a company goes into liquidation, the official receiver will look into the finances of the company. The official receiver needs to establish if there are any sums due to the company, which they can recover, in order to pay any outstanding creditors, before the company is closed down. This is why you will have received a communication in relation to an overdrawn directors loan account.

One of the areas that the official receiver will consider is sums taken out of the company by director shareholders by way of an income.

If you are contacted in relation to an overdrawn directors loan account, or you are concerned that errors have been made, we recommend that you speak to our solicitors without delay.

If you would like to have a free confidential discussion with a member of our team, please either make a Free Request For Call Back or call us directly on 01908 414990 and we will be pleased to help you.

It is relatively usual for directors who are also shareholders of a company to take funds from their company as a salary on a regular basis. These sums can be taken in place of or in addition to a PAYE salary as well. It is important to be aware that sums can only be withdrawn from a company in a certain way.  The most usual ways being:

  1. PAYE; and
  2. Dividends

It is perfectly acceptable for shareholders to take dividends from the profit of their company.  However, these dividends can only be paid if there are sufficient funds available in the company to pay onto shareholders, after all the company debts have been paid.

When a company goes into liquidation, if it is deemed that there are sums due to creditors, including sums due to HMRC, the official receiver will consider any sums taken out of the company by the director shareholders, in order to understand whether there were in fact sufficient funds available to pay these sums out in the first place.

If it is established that there were insufficient funds in the company to pay some or all of the dividends paid out. It means that some or all of the dividends paid should not have been paid out. Any sums which were paid that should not have been (as the company could not afford to pay them), will be classified as a director’s loan rather than dividends and are required to be paid back to the company by the director or directors that took them.

The official receiver will therefore write to you setting out the sums they believe form an overdue director’s loan account. They will usually include a schedule clarifying payments made from the company, and they will ask that the sums are repaid or that you respond to their letter within a certain period of time.

EXAMPLE

John runs ABC Ltd. John receives £500 a month from the company as PAYE. John also takes £2,000 a month out of the company to top up his salary by way of dividends.

In January 2022, ABC Ltd goes into liquidation. It is established at liquidation that the business has outstanding debts to HMRC – £10,000 due for Corporation tax. No other sums were due.

As there are sums due to HMRC when the company goes into liquidation, the official receiver will look into any sums taken out of the company which were not taken by way of PAYE. The official receiver can see that John took £2,000 a month by way of dividends, which over a 12-month period amounts to £24,000.

As the company in liquidation has a debt of £10,000 as corporation tax for that year which it cannot pay, it will be deemed that £10,000 was taken out of the company by way of dividends that the company did not have enough funds to pay. On this basis, the official receiver will conclude that of the £24,000 paid in dividends, the company was not in a position to pay £10,000 of these dividends, and that £10,000 of the sums taken out of the company cannot be classified as dividends. Instead, £10,000 taken out of the company would be classified as a director’s loan – being a loan from the company to the director – and further, the official receiver will look to recover this loan from the director so that creditors can be paid.

What if I can’t afford to repay the director’s loan?

Any sums taken from a company which the company was not in a position to pay out, must be repaid to the company. However, you can certainly raise the option of a repayment schedule if you are not in a position to pay it all in one go.

If sums are not repaid to the company, there is a risk of bankruptcy, so early communication with the official receiver and/or their solicitors or representative is crucial.

Do be aware that you may also have to pay tax on any director’s loan taken from the company, depending on the sums taken and how.

If you are contacted in relation to an overdrawn directors loan account, or you are concerned that errors have been made, we recommend that you speak to our solicitors without delay. We specialise in HMRC investigations, compliance and regulatory matters, and director disqualification. We can discuss your case with you and determine the best way forward.

If you would like to have a free confidential discussion with a member of our team, please either make a Free Request For Call Back or call us directly on 01908 414990 and we will be pleased to help you.