Writing off an overdrawn account

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When a director’s loan account is overdrawn, a liquidator or administrator will scrutinise historical accounts and invoices and track the company’s money to ensure that proper processes were followed and that financial transactions can be justified.

Even if the company has ‘written off’ the loan, a liquidator or administrator would most probably seek to reverse the write off where the company has received nothing of value in return.

In those circumstances they would ask the director to repay the overdrawn DLA to satisfy creditors.

If the company has fallen upon hard times, it might be that the director has drawn too much out and is unable to repay his/her loan account.

It is unrealistic to expect the liquidator or administrator to write off the DLA as it is an asset of the company that can be realised for the benefit of creditors.

The director will have to repay the loan out of their own pocket, or find a way of raising the money to do so.

There might be legitimate ways to reduce the amount owed to the company and thus reduce your personal liability; for example, you may have reasonable claims for expenses.

Overdrawn DLAs can occasionally be written off if the value of the loan is deemed insignificant by a liquidator or administrator and the director provides full financial disclosure to demonstrate that he/she is unable to repay it.

If the overdrawn DLA is written off, either by the company or by the liquidator/administrator, the amount will be treated as if it were a dividend.

HMRC would, therefore, look to recover the income tax payable on that dividend from the director who benefited.