It is not uncommon for directors or shareholders to owe money to their own company. This situation often arises through director’s loans, drawings taken in excess of salary or dividends, or business expenses that were never properly reimbursed. While this may seem manageable when a company is trading normally, it can become a serious issue if the business faces financial difficulty or enters liquidation.
Understanding what happens when you owe money to your own company is essential, particularly if insolvency is a possibility. The way this debt is treated can have significant legal and financial consequences for directors.
This article explains how director debts arise, how they are treated in liquidation, and what directors should be aware of under UK insolvency law.
How Do Directors End Up Owing Money to Their Company?
The most common way a director owes money to their company is through a director’s loan account (DLA). A DLA records money taken out of the company by a director that is not:
- Salary processed through PAYE
- A properly declared dividend
- Reimbursement of legitimate business expenses
Common examples include:
- Taking cash from the company to cover personal expenses
- Overdrawing from the company bank account
- Taking dividends when there are insufficient profits
- Using company funds for personal purchases
When these amounts are not repaid, the director effectively becomes a debtor of the company.
Is Owing Money to the Company Illegal?
Owing money to your own company is not illegal in itself. Many businesses operate with temporary director loan balances, and these can be repaid over time.
Problems arise when:
- The loan is not repaid
- The company becomes insolvent
- Proper records are not kept
- The loan breaches tax or company law rules
At that point, the debt becomes a key issue for insolvency practitioners and creditors.
What Happens to Director Loans in Liquidation?
When a company enters liquidation, all outstanding debts owed to the company become assets. This includes any money owed by directors.
The liquidator has a legal duty to maximise returns for creditors. This means they must investigate director loan accounts and take steps to recover any money owed.
From the liquidator’s perspective, a director who owes money is treated in the same way as any other debtor.
Can a Liquidator Force Me to Repay the Loan?
Yes. If you owe money to the company at the point of liquidation, the liquidator can demand repayment of the full outstanding balance.
If the director does not repay voluntarily, the liquidator can take further action, including:
- Negotiating a repayment plan
- Issuing a statutory demand
- Starting court proceedings
- Seeking a judgment against the director
Ignoring a director’s loan is not an option once liquidation has begun.
What If I Cannot Afford to Repay the Money?
If a director cannot repay the loan in full, this can lead to serious personal consequences.
Possible outcomes include:
- Agreeing a settlement or instalment arrangement with the liquidator
- The liquidator taking legal action
- The director facing personal insolvency options, such as an Individual Voluntary Arrangement (IVA) or bankruptcy
The liquidator cannot simply write off the debt unless there is a legal and commercial justification for doing so.
Can Director Loans Be Written Off?
In limited circumstances, a director’s loan may be written off, but this is not common in insolvent liquidations.
Writing off a loan can create:
- A personal tax charge for the director
- A loss to creditors
- Potential criticism of the liquidator if not justified
Any decision to compromise or settle a director loan must be clearly documented and defensible.
What About Tax Implications?
Director loans have significant tax implications, especially if they are not repaid promptly.
Key issues include:
- Section 455 tax: If a director’s loan is outstanding nine months after the company’s accounting period end, the company may be liable for additional corporation tax
- Benefit in kind: Loans over a certain threshold may attract personal tax if interest is not charged
- Income tax: Writing off a loan is often treated as taxable income for the director
These tax consequences do not disappear just because the company goes into liquidation.
Can I Offset the Loan Against Other Money Owed to Me?
In some cases, a director may also be owed money by the company, such as unpaid salary, expenses, or dividends.
Set-off may be possible where:
- There is a clear, legally enforceable entitlement
- The amounts are properly recorded
- The timing of the debts allows set-off under insolvency law
However, set-off is a technical area and is not always permitted. Liquidators will carefully review any claims to ensure they comply with insolvency rules.
What If the Company Is Solvent?
If the company is solvent and enters a Members’ Voluntary Liquidation, director loans still need to be addressed.
In an MVL:
- All debts must be repaid in full
- Directors are expected to clear loan balances before or during liquidation
- Outstanding loans will delay the distribution of funds to shareholders
A solvent liquidation does not allow directors to ignore money owed to the company.
How Director Conduct Is Reviewed
Liquidators are required to review the conduct of directors leading up to insolvency. Large or unexplained director loan balances can raise concerns, particularly if:
- Loans increased as the company’s financial position worsened
- Funds were used for personal purposes
- Repayments were not made when the company was struggling
This does not automatically mean wrongdoing, but it does increase scrutiny.
Why Early Advice Is Crucial
Directors often underestimate how seriously director loans are treated in liquidation. What may have seemed like an informal arrangement while trading can quickly become a formal debt with legal consequences.
Addressing director loans early, keeping proper records, and understanding your obligations can reduce risk and stress later on.
Simple Liquidation was designed to provide directors with a clear and straightforward route through liquidation. Their Insolvency Practitioners are authorised by the Insolvency Practitioners Association and the Institute of Chartered Accountants in England and Wales.
Jamie Playford FABRP MIPA and Alex Dunton MABRP are licensed Insolvency Practitioners regulated by the ICAEW and are also members of R3, the Association of Business Recovery Professionals. With over 30 years of combined experience, they have dealt with hundreds of cases involving director loan accounts in both solvent and insolvent liquidations.
Conclusion
Owing money to your own company is more than an accounting technicality, especially when liquidation is involved. In insolvency, director loans are treated as company assets, and liquidators are legally required to pursue repayment for the benefit of creditors.
Whether the company is solvent or insolvent, director loans must be addressed properly. Understanding the implications early and seeking professional guidance can help directors manage the situation responsibly and avoid unnecessary personal consequences.
Handled correctly, even difficult financial issues like director loans can be resolved in a structured and compliant way.