A Director’s Loan Account (“DLA”) allows a company director to take money from their limited company in a way other than a salary, dividend, or expense. Any transactions must be clearly recorded, and if you take out more money than you put in, the DLA will be overdrawn, and the director personally will owe their limited company this amount. If the figure is kept below £10,000, having an overdrawn DLA is not usually an issue. However, if the company becomes insolvent, the situation becomes much more complicated.
When a limited company goes into insolvent liquidation, the liquidators will consider an overdrawn DLA to be an asset of the company. Therefore, the director must pay back the money they have borrowed from the company so that the money can be used to repay the company’s creditors. Unfortunately, directors of insolvent companies are usually financially unable to do this at a time when their company is going into liquidation.
The company’s liquidators may pursue you personally for your overdrawn DLA so any money that they receive from you may be used to pay your former company’s creditors, including HMRC and the Covid Bounce Back Loan.
If the company’s liquidators issue you with a Statutory Demand, then you will have 21 days to apply to Court to set it aside, pay the debt in full or make reasonable proposals for settlement of the debt by instalments and/or in part. Failing this, the liquidators may petition for your personal bankruptcy so that your assets (such as your house and your car) may be sold to pay the debts of your former company.
The rules surrounding overdrawn DLAs when a company becomes insolvent are extremely complex, as are corporate insolvency, personal bankruptcy, and civil litigation generally. I recommend that you seek professional advice as soon as possible.