Covid-19 and director’s loan accounts
2 April 2020: A director’s loan account records the amount of money that is owed to the company by its director(s) or vice versa. When a company is facing financial difficulty due to a loss of customers, increase in payment demands that the company cannot afford to pay or other cash flow concerns, the director(s) need to be particularly careful when drawing company funds in order to cover personal overheads.
A director’s loan account does not arise where a director simply receives their salary each month, or when a dividend is paid out in full when declared; these represent payments due to the director/shareholder and therefore do not create a liability due to the company, so the loan account is irrelevant. Therefore, the loan account owed to the company increases when drawings are taken by directors without a supporting reason, such as salary or dividends owed.
During these unprecedented times, directors of owner managed businesses need to be careful of how they pay themselves. From experience of dealing with insolvent liquidations and administrations, when there is an outstanding director’s loan account due to the company, directors’ claims for redundancy from the Redundancy Payments Office will be rejected.
BRI Business Recovery and Insolvency have always given sound advice, irrespective of the fee outcome to us and with the numerous challenges business owners are now facing, it is important to know your duties and your rights and remain mindful of them.