Directors’ Loan Accounts: Navigating Personal Risk in Insolvency

If your company is facing insolvency and you’ve borrowed money from it over the years, you could be facing more than just the loss of a business – you could be asked to repay those sums personally. I’ve seen many directors caught off guard when they discover that what felt like ‘just drawings’ are now legally recoverable debts.

In today’s blog, I’ll explain what a director’s loan account (DLA) is, how they’re treated in insolvency, what the risks are, and what steps you can take to protect yourself and your company. I’ll also give you a takeaway checklist to help you stay one step ahead.

What Is a Director’s Loan Account?

A director’s loan account is a record of money a director has borrowed from or lent to the company. If you’ve taken funds out of the business for personal use – outside of salary or declared dividends – it will typically be recorded as an amount owed by you to the company.

This often arises when:

Directors draw down money monthly without formal dividends
The company pays for personal expenses
There are timing differences between profit and cash available

Why DLAs Matter in Insolvency

When a company enters liquidation or administration, the insolvency practitioner (IP) has a duty to realise all assets, including debts owed to the company by directors.

That means your overdrawn DLA becomes a recoverable asset. If you owe the company money, the IP may pursue you personally, even if the company is being wound up due to wider market or financial pressures.

Depending on the balance and your ability to repay, this can result in:

Personal demands for repayment
Negotiated settlements
Bankruptcy proceedings if unpaid

HMRC and DLAs

HMRC takes a close interest in overdrawn DLAs, especially when:

Loans are written off to avoid tax
Directors avoid PAYE and NIC by drawing funds as loans
No repayment schedule exists

Under Section 455 CTA 2010, a tax charge of 33.75% (increased from 32.5% from April 2022) applies to overdrawn DLAs that remain unpaid 9 months after the accounting year end. This tax is repayable by HMRC only once the loan is repaid.

➡️ See: HMRC guidance on directors’ loans

What Insolvency Practitioners Look For

As a liquidator, I’m required to examine:

Whether the DLA was properly recorded and documented
Whether the director repaid or intended to repay the loan
Whether funds were drawn after the company became insolvent
Whether any write-offs were agreed without shareholder authority
Whether the DLA formed part of any preference or misfeasance claim

Directors often say, ‘But the accountant said it was fine.’ The truth is, if the company is insolvent and the DLA is overdrawn, the IP must try to recover it unless it’s clearly irrecoverable (and even then, they must prove why).

Case Study (Anonymised)

A director of a family-run manufacturing business had drawn £70,000 over 18 months as informal monthly drawings, assuming profits would support a dividend later. When the company entered CVL, the last full dividend hadn’t been declared, and the DLA was still overdrawn.

The liquidator sought repayment. The director couldn’t pay in full, and after negotiation agreed a 12-month repayment plan to settle the account and avoid personal bankruptcy.

The key takeaway?

Treat drawings as loans until declared otherwise.

Practical Tips to Avoid DLA Trouble

Keep personal and business finances separate
Declare dividends formally with board minutes and accounts to support them
Avoid drawing funds without checking available reserves
Don’t assume your accountant’s silence means all is well
Repay loans within 9 months of year-end to avoid tax charges
Keep track of your DLA balance monthly, not just at year-end
Ensure your shareholders are aware of and approve any write-offs

Pre-Liquidation Planning for Directors

If your company is in distress and your DLA is overdrawn:

Stop drawing immediately unless it’s salary under PAYE
Review the DLA balance with your accountant or IP
Consider repaying part or all of the loan if funds are available
Document any attempts to settle or offset the DLA
Speak to an IP early – we can assess whether the balance is negotiable or recoverable

Takeaway Checklist

✅ Review your DLA balance monthly
✅ Declare dividends properly: don’t assume ‘drawings’ are tax-free
✅ Repay loans within 9 months of year-end to avoid a 33.75% tax charge
✅ Avoid taking funds when the company is in distress
✅ Speak to your accountant if you’re unsure
✅ Keep board minutes of any dividend or loan decisions
✅ Engage an insolvency practitioner early if insolvency is looming