If your company is under financial strain and you have an overdrawn director’s loan account, it will be a key focus in any liquidation. This guide explains how it’s treated, the section 455 tax position, repayment and set-off options (including redundancy), how Bounce Back Loan-funded drawings are viewed, and the steps to take before a Creditors’ Voluntary Liquidation (CVL) to limit personal exposure.

What is an overdrawn director’s loan account?

A director’s loan account (DLA) records money you take from or pay into the company that isn’t salary, dividends, or expense reimbursement. If your drawings exceed what you’ve put in, the balance becomes overdrawn in effect, you owe the company.

Common causes include taking regular drawings in anticipation of future dividends, withdrawing funds instead of PAYE salary, or covering personal costs from the company bank account. If profits fall or dividends aren’t lawfully declared, the DLA can remain overdrawn and create personal risk.

How an overdrawn director’s loan account is treated in insolvency

In a CVL or administration, the DLA is an asset of the company. An insolvency practitioner (IP) such as Molly Monks of Parker Walsh must review the account and seek repayment for creditors. Expect the liquidator to:

• Confirm the balance using bank statements, bookkeeping records and any board minutes.
• Ask you to repay the loan in full or agree a settlement/instalment plan.
• Apply statutory set-off against sums the company owes you (see below).

This is separate from wrongful trading or misconduct claims. An overdrawn DLA alone does not mean wrongdoing; however, large or poorly documented drawings, especially close to insolvency, will be scrutinised. If funds were used personally without proper authorisation, the liquidator may also consider misfeasance or transactions at undervalue.

Section 455 tax: what it is and what happens in liquidation

Where a close company (most small companies) makes a loan to a participator (typically a director-shareholder) and it remains outstanding at the period end, the company may be liable to section 455 tax at 33.75% of the outstanding balance. Key points:

• When payable: If the loan is still outstanding nine months and one day after the company’s year-end, the company pays s455 as part of its corporation tax process.
• Repayment of s455: If the loan is later repaid to the company, the company can normally reclaim the s455 tax. Relief is not available simply because the loan is written off.
• Benefit in kind: If your loan exceeds £10,000 at any time and carries little or no interest, there is usually a personal benefit-in-kind charge and the company owes Class 1A NIC.
• Write-off is taxable on you: If the company writes off or releases the loan, it is generally treated as a distribution (taxable on you, typically as dividend income). The company does not get a corporation tax deduction for writing off the loan.
• Anti-avoidance: The ‘bed and breakfast’ rules can apply if you repay and re-borrow within a short window, blocking s455 relief. Always take advice before moving money close to insolvency.

In liquidation, any outstanding s455 liability is a company debt. It is not your personal tax. Your personal exposure arises from the DLA itself and any personal tax on benefits or write-offs.

Repayment options and settling with the liquidator

Liquidators must maximise returns for creditors, but they can be pragmatic. Options often include:

• Lump sum repayment: Using personal savings or third-party funds to clear the balance.
• Affordable instalments: A time-to-pay agreement where a full lump sum is not possible.
• Compromise: In limited circumstances, a discounted settlement may be agreed where evidence shows limited means and no recoverable assets.

If you cannot repay, discuss the position early. Silence usually narrows your options and increases costs.

Set-off against money the company owes you (including redundancy)

On liquidation, the Insolvency Rules require mutual set-off between what you owe the company and what the company owes you. This can reduce the DLA balance. Typical items include:

• Unpaid salary/holiday pay/expenses: Contracted amounts owed up to the date your employment ends.
• Notice pay and statutory redundancy: If you are a genuine employee and meet eligibility criteria, these are debts the company owes you. The Redundancy Payments Service (RPS) may pay some or all of these and then take over the claim—but the mutual set-off is calculated first at the liquidation date.

Important nuances:‍

• Set-off is calculated on net amounts after tax/NIC, and statutory caps apply to certain claims.
• Redundancy for directors requires clear evidence of employment (contract, payslips, job role separate from shareholder control).
• You cannot create new liabilities simply to reduce your DLA; any claims must be valid and provable.

Bounce Back Loan-funded drawings

Bounce Back Loans (BBLs) are company debts with no personal guarantee. However, using BBL funds for personal drawings increases your DLA and will be reviewed. The liquidator will check:

• How the BBL was spent—on genuine business costs or personal withdrawals.
• Board decisions and cashflow at the time of withdrawals.
• Whether any transactions look like preferences or transactions at undervalue.

If BBL money effectively funded personal drawings without proper justification, expect the overdrawn DLA to reflect that, and be prepared to repay or settle. Clear records and a prompt, transparent explanation help avoid escalation.

Practical steps before a CVL to reduce personal exposure

The earlier you act, the more options you keep. Before starting a CVL, consider:

• Stop taking drawings immediately. Further withdrawals deepen the DLA and may be challenged.
• Reconcile the DLA. Work with your accountant to produce a month-by-month analysis tying to bank statements.
• Document everything. Board minutes for any remuneration decisions; schedules of expenses; mileage logs; explanations for large items.
• Avoid backdated dividends. Dividends require realised profits and proper paperwork. Backdating or declaring dividends without profits risks challenge.
• Consider repayment now. If you can reduce the balance from personal funds, do so—keep proof of payment and the narrative.
• Prepare your employee claim. Gather contracts, payslips and timesheets. This helps the IP calculate set-off correctly (wages, holiday, notice, redundancy).
• Do not prefer connected creditors. Avoid repaying family loans or connected party debts ahead of others.
• Get advice before any asset transfers. Moving assets out of the company can be challenged and may increase personal risk.

Common pitfalls to avoid

• Mixing personal and company spending. It complicates the DLA and invites scrutiny.
• Repay and re-borrow cycles. These can trigger anti-avoidance and won’t solve the s455 position.
• Relying on “dividends later”. Without profits and minutes, drawings remain loans.
• Late engagement with the IP. Early discussion often leads to more manageable settlements.

Key takeaway: An overdrawn director’s loan account is recoverable by the liquidator, and section 455 tax can add complexity. With accurate records, proper set-off, and early engagement, you can often reduce the personal impact. If you’re weighing up a CVL or need help reconciling your DLA, speak to Parker Walsh for clear, confidential guidance tailored to your situation.