Plenty of directors now know that losing their job when the company goes into liquidation can entitle them to redundancy pay, the same as any other employee. Far fewer realise that money they owe the company can cancel out some or all of that claim. If your director's loan account is overdrawn, the two figures are netted off against each other, and the amount you actually receive may be very different from the number you had in mind.

Directors can claim redundancy, but the claim doesn't stand alone

Being a director doesn't stop you being an employee. If you worked for the company under an employment contract, written or implied, and were paid a salary through payroll, you may be able to claim statutory redundancy pay, unpaid wages, holiday pay and notice pay when the company enters liquidation. These payments come from the Redundancy Payments Service and are subject to statutory limits. Our director redundancy assessment explains who qualifies and the evidence you'll need, and our article on whether a director can claim redundancy following liquidation goes into employment status in more detail.

What often gets missed is that your redundancy claim is a debt the company owes you. An overdrawn director's loan account is a debt you owe the company. Once a liquidator is appointed, those two debts no longer sit in separate boxes.

How set-off works in a liquidation

When a company enters liquidation, the Insolvency Rules 2016 require mutual debts between the company and another party to be set off. Each balance is weighed against the other and only the difference is paid or pursued. This is called insolvency set-off, and it is mandatory. Neither the liquidator nor the director can choose to ignore it.

For a director, the liquidator looks at what the company owes you as an employee, looks at what you owe through your loan account, and works out the net figure.

Say your employee claims add up to around £10,000 across redundancy, notice and holiday pay, and your loan account is overdrawn by £4,000. After set-off, your claim is worth roughly £6,000.

Now turn it around. If the loan account is overdrawn by £15,000, the whole £10,000 claim is absorbed. You receive nothing, and the liquidator will still ask you to repay the remaining £5,000.

These figures are illustrative only. Actual entitlements are calculated under the statutory rules and depend on your age, length of service and pay.

When the loan account is bigger than the claim

This is the scenario that catches directors out. Someone expecting a redundancy payment to cover the gap between jobs discovers it has been used to reduce what they owe, and there's still a balance left to settle.

That remaining balance is an asset of the company. The liquidator has a duty to recover it for the benefit of creditors, so it won't vanish because the company has closed. In most cases it can be dealt with through a monthly repayment plan or an agreed settlement based on what you can realistically afford. Our article on overdrawn director's loan accounts and your options explains how we approach this at Parker Walsh.

Knowing the likely outcome before the liquidation starts gives you time to plan. Finding out from a letter afterwards is a much harder position to be in.

Dividends, drawings and how they affect both sides

Many owner-managed companies pay directors a small salary topped up with dividends. While the company is profitable, that's a common and perfectly legitimate arrangement. It becomes a problem when dividends were paid at a time when there were no profits available to distribute.

A liquidator reviewing the accounts may challenge dividends paid without sufficient reserves and treat them as money owed back to the company. A loan account that looked manageable on paper can grow considerably once that review is complete.

The salary and dividend split matters for the redundancy side too. Dividends are a return on your shares, not wages, so they don't count as pay when your entitlement is calculated. A director paid mostly through dividends can end up with a modest employee claim on one side and an inflated loan account on the other.

Check the loan account balance before assuming the worst

Loan account figures are frequently inaccurate, and errors often work against the director. Before accepting a balance, check whether:

You paid business costs personally, such as mileage, equipment or supplier bills, that were never credited back to you.

Salary or bonuses were voted but credited to the loan account instead of being paid.

Money you put into the company was recorded properly.

Personal and business transactions were mixed up in the bookkeeping.

Every genuine credit you can evidence reduces the balance, and with it the amount set off against your claim. Receipts, bank statements and payroll records are what will back this up, so hold on to them. Our article on what books and records a director must give to the liquidator covers what to keep.

What you shouldn't do is try to clear the balance on paper, for example by declaring a last-minute dividend or bonus the company can't afford. Liquidators look closely at transactions made in the run-up to insolvency, and steps like this can lead to a misfeasance claim and questions about your conduct as a director.

Getting both questions answered together

The redundancy claim and the loan account are often treated as two separate conversations, sometimes with two different advisers. Because one directly changes the other, it makes far more sense to look at them side by side.

When Molly Monks F.I.P.A., our founder and Licensed Insolvency Practitioner, reviews a director's position, she considers the employment claim, the loan account and the company's wider circumstances together. You'll know the likely net result before anything is signed, and you can make decisions about repayment, timing and the liquidation itself with the full picture in front of you.

To find out where you stand, complete our free director redundancy assessment or book a consultation with Molly. Both are confidential and there's no obligation.

FAQs

Will the Redundancy Payments Service know about my loan account?

The insolvency practitioner supplies the RPS with information about each employee's claim against the company. Where set-off applies, your loan account forms part of that picture.

Can I repay my loan account before liquidation to protect my redundancy claim?

Repaying it with genuine personal funds reduces the balance and the amount set off against your claim. Clearing it through book entries, or through dividends and bonuses the company can't afford, is likely to be challenged.

Does set-off apply to holiday pay and notice pay as well?

Yes. Set-off applies to all mutual debts between you and the company, so redundancy pay, unpaid wages, holiday pay and notice pay can all be netted against an overdrawn loan account.

What if my director's loan account is in credit?

If the company owes you money, you're an unsecured creditor for that amount and your employee claims aren't reduced. The RPS won't repay money you lent to the company, though.

Do I still have to repay the loan account if I don't make a redundancy claim?

Yes. The overdrawn balance is owed to the company whether or not you claim, and the liquidator will look to recover it.

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