Directors Loan Accounts
Here you can download our Directors Loan Accounts 6 Frequently Asked Questions answered booklet. An example of the useful information you can find in the booklet is featured below.
Director’s Loans are one of the most common methods of drawing funds from a Company and yet the risk they present is perhaps one of the most overlooked areas and can present substantial problems for Directors both in terms of how they are accounted for, alleged breaches of a Director’s fiduciary duties and in respect of claims for recovery of an overdrawn Director’s Loan Account long after the Director may have parted ways with a Company.
Below we attempt to clarify some of the most common queries by Directors on Director’s Loan Accounts and what steps are available to assist them whilst running their Company or even thereafter.
1. Why Do Director's Loan Accounts Exist?
A Director’s Loan Account is a record of all loans to and from Directors of a Company. If Directors are also shareholders, when they incorporate or acquire a Company the funds they put in can either be accounted for as share capital (which improves the value of the Company) or can be accounted for as a Director’s Loan (which enables the funds to be paid back more easily).
Director’s Loan Accounts exist within a Company to ensure there is a clear understanding of monies advanced by Directors or lent to Directors, to ensure firstly that all readers of the Company’s financial accounts clearly understand how the Company is operating and secondly to ensure there is a transparency of all transactions with Directors, who are in control of the Company’s assets and thus Shareholders’ interests and otherwise may have a conflict of interest.
The Director’s Loan Accounts are required to be identified in a Company’s financial accounts and a separate record should be continuously maintained by the Company.
In small Companies they may exist to reflect the balance of monies owed to or by Directors during the year, a position which may be altered at the year-end by the declaration of a dividend payment.
2. Are Drawings Director's Loan Acounts?
Money drawn from a Company, usually a small or medium-sized Companies, by Directors can be accounted for in several ways – as payments for expenses, as salary or remuneration payments, as dividends (where the Directors are also Shareholders) or – if none of the above apply – ultimately as Directors’ Loans.
The default position in a Company where money has been withdrawn by Directors is that such monies should be regarded as a debit to the Director’s Loan Account unless they can be accounted for otherwise.
A salary could be justified by an employment contract, payslips and tax returns. Remuneration can be justified by reference to a consultancy agreement or a service level agreement (dependant on the service period and whether shareholder approval is required). Payments for expenses would be ordinarily justified by reference to the appropriate expense claim documents and receipts or invoices.
A dividend payment would have to be supported by a Board Resolution to declare a dividend and this could only be legitimately passed if sufficient distributable reserves exist within the Company.
Otherwise, any payment to Directors will likely be accounted for as a Director’s Loan and thus may lead to an overdrawn Director’s Loan Account.
3. What Are The Restrictions On A Directors’ Loan?
A Director’s Loan will either be a loan to the Company or a loan from the Company.
It is perfectly legitimate, subject to any amendment to the Company’s Constitution or otherwise, for a Director to loan money to a Company, provided there are no undeclared preferential terms and no other conflict of interest.
However, a loan to a Director (or any other Company s/he may have an interest in) is not permissible unless it has been authorised by a majority of shareholders, subject to certain statutory exceptions.
There are of course certain statutory exceptions to this rule, but generally Directors must obtain the consent of Shareholders to draw money from the Company by way of a loan. Exceptions relate to the amount of the loan, the purpose of the loan and whether the loan is in pure monetary terms.
This rule also applies to other “substantial” property transactions which involve Directors.
4. Can I Lean Money From The Company Without Approval By Shareholder?
The answer to this question generally is no and the Directors’ Loan Account should not normally be debited with such transactions.
However, there are some exceptions which exist to manage the conflict between Shareholders and Directors but balance this with the need for Directors to be free to properly conduct the Company’s business.
These exceptions include:
IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.
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5. What If I Do Not Pay Back The Balance On My Director's Loan Account?
6. Can I Write Off My Director's Loan Account Balance?
Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.