Overdrawn directors’ loan balances – Part 2

22 October 2018

In my previous blog, I considered the implications of an overdrawn director’s loan balance in a company with cash flow struggles.

Taking this one step further, if the company in question enters an insolvency process, then the appointed insolvency practitioner will be looking for repayment of that loan balance in full. The terms of repayment can be negotiated, but at a time when potentially the director’s source of income – often only the salary from the company – might well have now ended due to the insolvency event, then the question has to be asked - how will the debt will be repaid?

In such a scenario, and where the director doesn’t have surplus assets to sell to raise the necessary funds, it may prove necessary to enter a personal debt repayment plan or formal personal insolvency process – something that should only be done as a last resort. However this may be unavoidable as the appointed insolvency practitioner may go to court to force the issue if they can justify it being in the best interests of the company’s creditors to do so, in order to achieve some recovery of the outstanding balance.

But what if the director writes off the loan in the company’s accounts before the company enters the insolvency process? Sorry, but that won’t work either as the insolvency practitioner has powers to overturn such a write off and then pursue the debt as described above.

In summary:

  • Directors should not fall into the trap of thinking that the company’s money is their money – it isn’t.
  • If a loan is taken from the company, think of it in the same way as you think of a personal loan from a bank – it will have to be repaid.
  • Directors should not withdraw money from the company bank account for personal use, without a full understanding the implications of doing so.

When times are good, profits are being made and the cash is rolling in, then whilst the above is still best practice, any loan position can probably be rectified quite easily with minimal cash implications. When times are not so good and directors are struggling to keep on top of the company’s debts, then advice from a licensed insolvency practitioner is critical. We don’t have a magic wand to change the circumstances in which the company finds itself, but we can ensure than matters don’t get any worse, and a plan to deal with the circumstances can be formulated.

The Restructuring and Recovery team at AAB have many years of experience in advising directors of distressed businesses, and are happy to meet with any director looking for advice for an initial meeting at no cost and with no obligation.

For more information contact Neil Dempsey, Restructuring & Recovery Director (neil.dempsey@aab.uk) or your usual AAB contact.

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