Why You Cannot Write Off An Overdrawn Director’s Loan Account In Liquidation
You cannot write off an overdrawn director’s loan account in liquidation because it is neither the purpose of a liquidation to write off company debts nor its assets. Quite the reverse is true. The duty of any liquidator is to get in, realise the assets to enable a distribution to be made to creditors so that they suffer as little loss as possible.
Director ODLA Misunderstanding
When a company enters liquidation, it is not an unknown misconception among some directors that their overdrawn director’s loan account (“ODLA”) will simply be written off. This is not how company law operates.
It is no part of the function of liquidation to enable assets of an insolvent company to be written off. A solvent company can do so through its shareholders if the proper procedures are followed.
An ODLA Is A Company Asset
The reason for this approach is straightforward: an overdrawn director’s loan account is an asset of the company.
Just like any other company asset, such as all cash in the bank, outstanding invoices due from customers, stock, machinery, or intellectual property, an ODLA must be dealt with by the liquidator. The liquidator is required to realise all material company assets to attempt to repay creditors (in an insolvent liquidation) and distribute the surplus assets after costs to shareholders (in a solvent liquidation).
Liquidation Is Not An Asset Write Off Tool
Liquidation is not a process that wipes away the company’s assets. It is a formal legal procedure that enables an orderly winding up of a company, which ensures assets, including any money owed to the company by its directors, are recovered where possible.
The fact that the person owing the money is a director, rather than an external customer or client, makes no difference. The obligation to repay an ODLA remains. A liquidator ought to only write off or release a director from repaying an ODLA in circumstances where it is clear that it cannot be repaid or where there is a fundamental uncertainty about its amount that makes a compromise with the director of any resulting dispute cost-effective.
Liquidator’s Duty To Act In The Interests Of Creditors
In an insolvent liquidation, the priority is to recover as much as possible for the benefit of creditors. Therefore, a liquidator will need to seek to recover the ODLA as far as is realistically commercially achievable. Whether the director has the means to pay and whether some form of settlement can be negotiated is a separate issue.
The starting point remains: the overdrawn DLA is a debt owed to the company and must be addressed. Even if the company is being wound up voluntarily, this principle holds.
In a solvent liquidation (known as a Members Voluntary Liquidation (“MVL”)), the recovery of company assets is equally important, except in that case, the assets are returned to shareholders after liabilities are settled and creditors are paid in full.
Given that the liquidator has a legal duty to pursue the ODLA, ignoring the request for repayment or assuming it will be “written off” could lead to serious consequences, including legal action by the liquidator.
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Have questions or concerns about director’s loan accounts or liquidation? Get in touch. We know insolvency inside out and can help guide you through your options.
