Director Liability for loans and drawings

What to do if the accounts show directors loans or drawings owing to the company

Often a company’s financial accounts will show “directors loans”. That is an amount owing by a director to the company. So it is an asset of the company that is recoverable by a company or the company’s liquidator.

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Directors Loans – How the problem develops

The history will be that:

• the company has been making profits in the past and the accountants advise that tax can be saved by paying directors a small salary with the balance of drawings being put to a “loan account”, then the company strikes troubled times; or
• a director has simply been drawing funds from the company, effectively being a salary, but the bookkeeper has been coding that as “Drawings” or “Directors Loans” in the accounts; or
• it is a genuine loan from a company to the director.

If the company enters any form of insolvency administration, such as liquidation or voluntary administration, then a liquidator will, quite reasonably, require the amount to be repaid to the company.

What can you do?

Options available include the following:

• Repay the debt you personally owe to the company.
• Offset any loans the directors have made into the company (this is called set off).
• Take your full salary but reduce the cash you take out of the business to gradually offset the account. So pay yourself $5,000 per month but take $1,000 only with the balance being set against the loan account. Remember the company will need to pay PAYG on the full $5,000.
• Discuss the matter with your external accountant.
• Use a Voluntary Administration to come to an arrangement where all parties are better off.

Related Topics

If the above advice has not answered your questions you might want to review the following pages and downloadable Information Sheets:

• Director Liability for Company Tax Debts
• Directors duties when facing Insolvency
• Personal Guarantees by Directors

Or please call us for free advice.