Taking money out of a company must be done correctly to avoid unexpected tax. Many Company Directors take money from their business outside of their salary or dividends. These transactions are recorded in a Director’s Loan Account (DLA) and are a normal part of running many owner-managed companies.
However, if your company enters liquidation, your Director’s Loan Account can quickly become one of the most important financial issues you need to deal with.
If you owe money to the company through an Overdrawn Director’s Loan Account, the liquidator is legally required to recover those funds for the benefit of creditors. On the other hand, if the company owes you money, you may be entitled to repayment — but only after higher-ranking creditors have been paid.
Understanding how Director’s loans are treated during liquidation can help you avoid unnecessary legal action, financial penalties, and delays to the insolvency process.
In this guide, we’ll explain:
- What a Director’s Loan Account is
- What happens to a Director’s Loan during liquidation
- What happens if you owe money to the company
- What happens if the company owes you money
- How Director’s loans are treated in MVLs and CVLs
- Whether a Director’s Loan can be written off
- What are your options if you cannot repay
- How Clarke Bell can help.
What is a Director’s Loan Account (DLA)?
A Director’s Loan Account (DLA) records all money borrowed from or lent to a company by one of its Directors.
Most Directors receive money from their company through one of three methods:
- Salary, paid through PAYE and subject to Income Tax and National Insurance.
- Dividends, paid from company profits to shareholders.
- Business expenses, reimbursed for legitimate company costs.
If a Director takes money from the business outside of these categories — or personally pays company expenses — the transaction is recorded in the Director’s Loan Account.
Rather than being a separate bank account, the DLA is simply an accounting record showing whether money is owed by the Director or the company.
A Director’s Loan Account can be:
- In credit, where the company owes money to the Director.
- Overdrawn, where the Director owes money back to the company.
This balance becomes particularly important if the company later becomes insolvent.
When does a Director’s Loan arise?
Director’s loans arise more often than many business owners realise.
Examples include:
- Taking cash from the company that isn’t salary or dividends.
- Using company funds for personal purchases.
- Paying personal bills from the company account.
- Lending personal money to the company.
- Paying company expenses from your own pocket.
Every transaction should be properly recorded to ensure the Director’s Loan Account accurately reflects the balance between the Director and the company.
Keeping accurate accounting records is essential. Poor bookkeeping can make it difficult for an Insolvency Practitioner to determine whether money is owed by the Director or the company, potentially leading to disputes during liquidation.
What is an Overdrawn Director’s Loan Account?
A Director’s Loan Account becomes overdrawn when a Director withdraws more money from the company than they have contributed or repaid.
In simple terms, this means the Director owes the business money.
For example:
- You withdraw £40,000 from the company.
- Only £15,000 is salary or dividends.
- The remaining £25,000 is recorded as a Director’s Loan.
Until that £25,000 is repaid — or cleared through other legitimate means — it remains an outstanding debt owed to the company.
While an overdrawn DLA isn’t necessarily a problem for a healthy company, it becomes much more significant if the business later enters liquidation.
What happens to a Director’s Loan in liquidation?
When a company enters liquidation, a licensed Insolvency Practitioner is appointed to take control of the business.
Their role is to:
- Collect company assets.
- Sell those assets where appropriate.
- Investigate the company’s financial affairs.
- Distribute funds to creditors in accordance with insolvency law.
One of the first things the liquidator will review is the Director’s Loan Account. If the account shows the Director owes money to the company, the outstanding balance becomes a company asset.
Just like unpaid customer invoices or money owed by suppliers, the liquidator has a legal duty to recover those funds wherever possible. This means an overdrawn Director’s Loan cannot simply be ignored because the company is closing.
The liquidator will usually:
- Review the company’s accounting records.
- Confirm the outstanding loan balance.
- Contact the Director requesting repayment.
- Discuss possible repayment arrangements where appropriate.
- Consider legal action if repayment is refused.
The earlier the issue is addressed, the more options are usually available.
Why does the liquidator have to recover the loan?
Many Directors are surprised to discover they remain personally responsible for repaying money borrowed from their company.
The reason is straightforward. When a company enters liquidation, the liquidator must act in the interests of creditors — not the Directors or shareholders. An Overdrawn Director’s Loan Account represents money that belongs to the company.
Recovering those funds increases the amount available to repay creditors, employees, HMRC, suppliers, and other parties owed money. If the liquidator failed to pursue an outstanding Director’s Loan without good reason, they could themselves be criticised for failing to maximise returns to creditors.
What happens if the Director owes money to the company?
If your Director’s Loan Account is overdrawn, you remain personally liable for repaying the outstanding balance. The liquidator will normally write to you requesting repayment after reviewing the company’s accounts.
Depending on your circumstances, repayment may involve:
- Paying the balance in full.
- Agreeing a structured repayment plan.
- Negotiating a settlement if appropriate.
Ignoring correspondence from the liquidator is rarely advisable.
If repayment is refused without justification, the liquidator may begin legal proceedings to recover the debt. In many cases, the courts will support the liquidator because the outstanding loan belongs to the company rather than the Director personally.
Related: The Impact of Insolvency on Directors: What You Need to Know
What happens if you cannot repay the loan immediately?
Not every Director has the personal funds to repay an overdrawn Director’s Loan in a single payment. If you are open and cooperative, the liquidator may be willing to discuss alternative solutions.
Depending on your financial circumstances, these could include:
- Monthly repayment arrangements.
- Negotiated settlements.
- Allowing time for assets to be sold.
- Other practical repayment options.
Every case is different.
The liquidator’s primary objective is to recover the greatest return for creditors, which sometimes means reaching a commercial agreement rather than immediately pursuing court action.
However, this should never be assumed. Seeking professional advice as early as possible gives you the best chance of finding an appropriate solution.
What happens if you refuse to repay?
Refusing to engage with the liquidator can significantly increase the seriousness of the situation.
If repayment cannot be agreed voluntarily, the liquidator may:
- Apply to the court for repayment.
- Obtain a County Court Judgment (CCJ).
- Enforce the debt against personal assets.
- Petition for your bankruptcy where appropriate.
In addition to recovering the loan itself, you may also become responsible for legal costs and interest. The longer the matter remains unresolved, the fewer options may be available.
Can an overdrawn Director’s Loan lead to further investigations?
Yes. An overdrawn Director’s Loan does not automatically mean a Director has acted improperly. However, the liquidator is required to examine the circumstances surrounding the loan.
They may investigate further if they believe:
- The loan was taken while the company was already insolvent.
- The Director knew the company could not repay its creditors.
- Company funds were used for personal benefit at the expense of creditors.
- Accounting records are incomplete or inaccurate.
- Money was withdrawn without any realistic prospect of repayment.
If misconduct is identified, the consequences can be much more serious than simply repaying the loan.
Depending on the findings, Directors could face:
- Director disqualification for between two and fifteen years.
- Misfeasance proceedings.
- Personal liability for certain company debts.
- Wrongful trading claims.
- Fraud investigations in the most serious cases.
Fortunately, the majority of liquidations do not result in these outcomes.
Directors who maintain accurate records, cooperate fully with the Insolvency Practitioner, and seek advice early are generally in a much stronger position.
What happens if the company owes money to the Director?
A Director’s Loan Account can also work in the opposite direction.
If you’ve personally lent money to your company — or paid business expenses from your own funds — the company may owe money to you. This creates a credit balance on your Director’s Loan Account.
Unlike an overdrawn loan, you are not required to repay anything. Instead, you become one of the company’s creditors. However, whether you receive repayment depends on the type of liquidation and the company’s financial position.
In an insolvent liquidation, Directors with money owed to them are generally treated as unsecured creditors.
This means repayment only occurs after:
- Fixed charge holders.
- Liquidation costs.
- Preferential creditors (including certain employee claims).
- Floating charge holders.
- The prescribed part for unsecured creditors.
Only then are unsecured creditors paid from any remaining funds. If sufficient assets remain, you may recover all or part of your Director’s Loan. If the company has very few assets, however, there may be little or nothing left to distribute.
Unlike an overdrawn Director’s Loan — which the liquidator will actively pursue — a credit balance offers no guarantee of repayment.
Related: Who Are Preferential Creditors?
Director’s Loans in a Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation (MVL) is used when a company is solvent and can fully pay all its debts. Directors often choose this process for tax-efficient company closure, as capital distributions through an MVL can be taxed at a lower rate under Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).
Since an MVL is a solvent liquidation, it is a straightforward and controlled process, provided all financial matters, including Director’s loans, are addressed before completion.
What happens to a Director’s loan in an MVL?
If your DLA is overdrawn, meaning you owe money to the company, you must repay the loan in full before the liquidation is finalised. As the company is solvent, Directors are expected to clear any outstanding debts to ensure a smooth process. Failure to repay could delay the MVL or impact the final distribution of company funds.
If the company owes you money, meaning your DLA is in credit, you will be repaid before shareholders receive their final distributions. Since all creditors must be paid in full before the MVL can proceed, Directors in this position are more likely to recover the full amount owed.
Director’s Loans in a Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation (CVL) is used when a company is insolvent and unable to pay its debts as they fall due. In this situation, the company must be closed, and a licensed Insolvency Practitioner is appointed to recover company assets to repay creditors.
Since the company does not have enough funds to cover all its debts, the liquidator’s primary responsibility is to act in the best interests of creditors. This means they must collect as much money as possible, including any outstanding Director’s loans.
What happens to a Director’s loan in a CVL?
The liquidator will demand full repayment if your Director’s loan account is overdrawn. An overdrawn DLA is classed as a company asset, so it must be recovered to maximise returns for creditors. The liquidator will assess your financial position and, if necessary, may pursue legal action to recover the outstanding amount.
If you fail to repay, the liquidator has the authority to take legal action against you. This could result in:
- Personal liability, where you are held personally responsible for repaying the debt.
- Bankruptcy — if the debt is substantial and you cannot afford to repay it.
- A negotiated settlement, where you may be allowed to repay a reduced amount.
If the liquidator suspects funds were withdrawn irresponsibly or you continued taking loans while the company was already insolvent, they may launch a misfeasance investigation. This could lead to serious consequences, including:
Director disqualification: A ban from serving as a Company Director for up to 15 years.
Court action: If wrongful trading or misfeasance is proven, you could be held personally liable for company debts.
Criminal prosecution: In extreme cases, fraudulent behaviour could lead to criminal charges, fines, or imprisonment.
If you have an overdrawn Director’s loan and your company is struggling financially, it is crucial to seek professional advice early to explore your options and avoid serious legal and financial consequences.
Related: Is a Creditors’ Voluntary Liquidation Right For My Business?
Can a Director’s Loan be written off?
One of the most common questions Directors ask is whether an overdrawn Director’s Loan simply disappears once the company enters liquidation.
In most cases, the answer is no. Because the loan is an asset belonging to the company, the liquidator has a legal duty to recover it wherever possible.
However, every situation is different. There are circumstances where full repayment may not be achievable.
For example:
- The Director has no significant personal assets.
- The costs of legal action outweigh the likely recovery.
- A negotiated settlement would provide a better return to creditors.
- Repayment over time offers the best commercial outcome.
This does not mean the loan has been automatically written off. Instead, the liquidator will assess each case individually and decide which course of action best serves creditors’ interests.
What happens if you cannot repay your Director’s Loan?
Not every Director is in a position to repay a substantial Director’s Loan immediately.
If this applies to you, it is important to communicate openly with the liquidator as early as possible.
Possible solutions may include:
- A structured repayment plan.
- A negotiated settlement.
- Time to sell personal assets.
- Other commercially viable repayment arrangements.
In some circumstances, Directors may also need to consider personal insolvency solutions such as an Individual Voluntary Arrangement (IVA) or, in more serious cases, bankruptcy.
Seeking professional advice early gives you the greatest number of options and may help avoid more serious legal action.
Can you offset a Director’s Loan?
Sometimes. Offsetting means using money the company owes you to reduce the amount you owe the company.
For example:
- You owe the company £25,000 through an Overdrawn Director’s Loan Account.
- The company owes you £8,000 for money you previously lent the business.
Depending on the circumstances and the company’s accounting records, these balances may be capable of being offset against one another.
However, offsetting is not automatic. The liquidator will need to review the company’s accounts and determine whether the transactions are legitimate and properly documented. Because every situation is different, it is important to seek professional advice before assuming an offset is possible.
Can dividends be used to clear an overdrawn Director’s Loan?
Potentially — but only in certain circumstances.
If the company is still trading profitably and has sufficient distributable reserves, lawful dividends may be declared before liquidation begins. These dividends can sometimes reduce or eliminate an Overdrawn Director’s Loan Account.
However, dividends must always be:
- Properly declared.
- Supported by sufficient profits.
- Accurately recorded.
Declaring unlawful dividends shortly before insolvency could create additional problems and may be challenged by the liquidator.
Directors should never attempt to clear an overdrawn Director’s Loan through dividends without first obtaining professional advice.
Common mistakes Directors make
Many Director’s Loan issues arise because relatively small problems build up over time.
Some of the most common mistakes include:
-
Treating company money as personal income
Using company funds for personal expenses without recording them correctly can quickly create a substantial Overdrawn Director’s Loan Account.
-
Poor bookkeeping
Incomplete accounting records make it much harder to establish the true loan balance during liquidation.
-
Assuming the loan disappears when the company closes
Many Directors mistakenly believe liquidation automatically wipes out the debt.
Unfortunately, this is rarely the case.
-
Continuing to take money after the company becomes insolvent
Taking further withdrawals while the company is unable to pay its creditors can attract much greater scrutiny from the liquidator.
-
Waiting too long to seek advice
Early professional advice often provides more options than waiting until liquidation has already begun.
How to avoid Director’s Loan problems before liquidation
The simplest way to avoid difficulties is to keep your Director’s Loan Account under regular review.
Before entering liquidation, consider:
- Ensuring your accounting records are up to date.
- Understanding whether your DLA is overdrawn or in credit.
- Speaking to your accountant about any outstanding balances.
- Avoiding unnecessary withdrawals if the company is experiencing financial difficulties.
- Seeking advice from a licensed Insolvency Practitioner before making major financial decisions.
Taking proactive steps early can significantly reduce complications later in the liquidation process.
Why choose Clarke Bell?
For more than 30 years, Clarke Bell has helped Company Directors navigate every stage of the insolvency process with clear, practical advice.
Whether you’re considering a Members’ Voluntary Liquidation, facing financial difficulties, or need guidance on an Overdrawn Director’s Loan Account, our experienced team can explain your options and help you make informed decisions.
We understand that every business is different. That’s why we take the time to understand your circumstances before recommending the most appropriate course of action.
If you’re concerned about your Director’s Loan or would like advice on liquidation, contact Clarke Bell today for a free, confidential consultation with one of our experienced advisers.
Frequently Asked Questions
Can I repay my Director’s Loan in instalments?
Possibly. Depending on your financial circumstances, the liquidator may agree to a structured repayment plan if it provides the best outcome for creditors. Every case is assessed individually.
Can HMRC investigate a Director’s Loan Account?
Yes. HMRC may review Director’s Loan Accounts as part of broader enquiries into a company’s tax affairs, particularly if loans remain outstanding or tax rules relating to Director’s loans have not been followed correctly.
Does an overdrawn Director’s Loan affect my personal credit score?
Not automatically. However, if legal action results in a County Court Judgment (CCJ) or bankruptcy, your personal credit rating could be affected.
Can more than one Director have a Director’s Loan Account?
Yes. Many companies have separate Director’s Loan Accounts for each Director, allowing individual transactions to be accurately recorded.
What records should I keep for my Director’s Loan Account?
It’s good practice to retain accounting records, bank statements, dividend vouchers, expense claims, loan agreements, and any correspondence relating to transactions recorded in the Director’s Loan Account.
Is there a deadline for repaying a Director’s Loan before liquidation?
There is no single statutory deadline, but addressing an overdrawn Director’s Loan before liquidation begins is generally much simpler than dealing with it once a liquidator has been appointed.
Can I use personal assets to repay my Director’s Loan?
Yes. Some Directors choose to use savings or sell personal assets to clear an Overdrawn Director’s Loan Account before or during liquidation, helping to resolve the matter more quickly.
Should I seek advice before my company enters liquidation?
Yes. Obtaining advice from a licensed Insolvency Practitioner before liquidation can help you understand your obligations, explore your options, and minimise the risk of unexpected legal or financial consequences.
