Overdrawn Directors' Loan Beware

We have now been advised three times in recent weeks that Insolvency Practitioners are actively seeking to recover overdrawn loan accounts when companies fail and then enter liquidation. HMRC has tasked insolvency practitioners with investigating how the overdrawn loans have come about and, in particular, whether any of it was funded by a bounceback loan. This has been reinforced by a recent court case, J Bass & Other v B Buchanan. 

 

In this case, the taxpayer (Mrs B) had a company that went into liquidation, leaving an overdrawn director’s loan account (“DLA”) in excess of £250,000. Like many small business owners, Mrs B took an annual salary of £8,000, topped up by voting dividends. However, the dividend did not cover what had been drawn and as a result the DLA was allowed to increase year by year. Mrs B subsequently tried to argue that the DLA balance was in fact remuneration and was not a company asset that could be pursued. 

 

The court, however, was clear that Mrs B could not rewrite history and she now faces the nightmare prospect of repaying the sum to the liquidators. 

 

It is not uncommon for Business Owners to operate in this way and many Directors can find themselves in this position, particularly when they have enjoyed a lifestyle while allowing taxes to build up in the background. 

 

There is, however, a change of mood in the economy right now and insolvency practitioners are seeking to maximise recovery of funds on behalf of clients, particularly HMRC. 

 

If you find you are in this position you need to act in a positive way to repay the amounts outstanding.