HomeFWJ TakeawayClaims against directorsClaims by HMRCWhat if I do not pay or write off the balance on my directors loan account?

A director’s loan is ultimately a debt owed to the Company. It is generally repayable upon demand (unless there is an alternative agreement providing for repayment terms).

Both the company and the director face risks personally if director’s loans are not repaid at the year-end or at all.

If a loan is not paid back either at the year-end or thereafter, the company may become liable to pay tax on such sums to HM Revenue & Customs, as it is widely recognised that directors loans are a tool often used to enable owner/managers of companies to withdraw income without accounting for taxes that would otherwise be due.

Should a company fall into insolvency or be wound-up, repayment of the directors loan may well be sought by a subsequently appointed liquidator or administrator as part of his/her statutory duties to liquidate all company assets (including book debts). In such circumstances, the company may well be entitled to claim interest on the loan, especially if it has been outstanding for some time.

If a director decides instead to write off the loan s/he owes, they must first consider the impact on the company and all other stakeholders, including shareholders, creditors and the public interest generally.  If the company is insolvent at the time, this transaction can quite easily be undone by a subsequently appointed liquidator or administrator, and the director could also find themselves liable for interest and legal costs arising therein.

A director whose loan is written off could, if s/he subsequently resigned, may also be subject to proceedings brought against him/her by the company itself, co-directors or shareholders for breaches of his/her fiduciary duties to the company or for a straight repayment of this debt.

HM Revenue & Customs are also aware of these type of circumstances and so a write off of a director’s loan (especially if referred to in financial accounts) may lead to tax investigations.

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