DLA Danger: What Directors Need to Know Before It’s Too Late
Why your overdrawn director’s loan account could cost you personally
If your business is struggling and you’ve been taking money from your company through drawings rather than salary or dividends, it’s time to pay attention.
An overdrawn Director’s Loan Account (DLA) is one of the most common causes of personal liability when a company enters liquidation. Yet many directors have no idea the risk they’re sitting on until it’s too late.
In our latest Business Lifeline podcast episode, we unpack the dangers of overdrawn DLAs, the legal duties involved, and the real-world consequences if you get it wrong.
🎙️ Listen now: DLA Danger: What Directors Need to Know Before It’s Too Late
What Is a Director’s Loan Account?
A DLA is simply a record of money flowing between a company and its director, outside of normal salary and dividends. In small businesses, it’s common for directors to draw funds informally during the year, with the intention of clearing the balance by declaring a dividend at year-end.
But if that dividend never happens – because the company lacks sufficient profits – then the drawings become a loan owed to the company. And if the company goes into liquidation, the liquidator has a duty to recover that money from the director personally.
What Happens in Liquidation?
When a company is insolvent, all of its assets must be collected in for the benefit of creditors. And yes, that includes the overdrawn DLA.
Even if the company itself has written the loan off, a liquidator can reverse that and pursue repayment. If the director can’t repay, they may face:
Legal action
Personal bankruptcy
Disqualification as a director
In some cases, criminal sanctions if there’s been wrongdoing
Case Law: Courts Won’t Let You Reclassify the Past
The courts have been very clear in recent years—directors cannot simply re-label historic payments as salary or expenses after the event to avoid liability.
In the Bronia Buchanan case, the director was ordered to repay over £286,000 after trying to reclassify her loan as remuneration. In Jones v Sky Wheels, an attempt to recharacterise drawings as unpaid wages also failed. And Global Corporate Ltd v Hale confirmed that interim dividends paid while the company was insolvent were unlawful—and had to be repaid.
The lesson is clear: you can’t rewrite history. What matters is how payments were recorded and justified at the time.
What You Should Do If You Have an Overdrawn DLA
If your business is in financial trouble and your DLA is overdrawn, take action now:
✔️ Reconcile your loan account and check the figures
✔️ Identify any legitimate offsets (e.g. business expenses paid personally)
✔️ Consider repaying part or all of the loan
✔️ Seek advice early—settlements can often be negotiated with a liquidator
Final Thoughts
An overdrawn director’s loan account isn’t just an accounting line – it’s a real liability that could come back to haunt you.
The earlier you get advice, the more options you have. Ignoring it won’t make it go away.
🎙️ For a full breakdown of the risks, real-world cases, and practical steps you can take, listen to our latest podcast episode:
👉 DLA Danger: What Directors Need to Know Before It’s Too Late