It is surprisingly common that a major asset of an insolvent company is an overdrawn director’s loan account (‘DLA’). It has also struck me recently that many directors and even accountants appear to be ignorant of how it arises and what its consequences can be. Here then, is a summary.
What is a DLA?
A DLA is a loan of funds to the director of a company, from the company’s funds. (It can also be the other way, from the director to the company).
How does it arise?
It’s a default account that any payments from the company to the director are put to, if the payments cannot be allocated to anything else, eg salary, business expenses, or the like.
What are the consequences of a DLA?
A DLA is not illegal, so there are no criminal implications. There may be tax implications if a loan is outstanding at the end of the company’s corporation tax accounting period, and not repaid within 9 months.
From our perspective, the greatest risk is that, in the event of insolvency, the DLA is a recoverable debt, just like any other debt due to the Company. The appointed insolvency practitioner will therefore pursue the director for full repayment from their personal means.
How do I avoid a DLA and its consequences?
Always make sure anything you take is accounted for – perhaps as salary (with tax/NI declared and paid), as traceable business expenses or, if you are a shareholder and there are sufficient reserves in the company, as dividends. And always remember: the company’s bank account is not your own, so don’t treat its funds like they’re yours!
At WSM Marks Bloom we have three Licensed Insolvency Practitioners ready to speak with individuals and companies in financial distress. Give us a call at WSM’s Kingston Office on 020 8939 8240 or email firstname.lastname@example.org, and an expert will be ready to assist you.