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Directors in distress: making sense of loans and dividends
When seeking insolvency advice, a director needs to be aware that any Director’s Loan Accounts (DLAs) taken as part of a remuneration package are dealt with accordingly.
Directors or shareholders may have been taking what they thought were dividends in the run up to an insolvent liquidation, when this would actually be classed as a loan.
Interim dividends would only be categorised as dividends at the year end, on the basis there were sufficient reserves from which to pay.
Having worked with directors and their advisers over many years, experience tells us that it is important to be open and honest at the initial stages of any insolvency discussion so that directors understand any personal implications that an insolvent liquidation may bring.
Once appointed, the Liquidator is required to investigate and pursue any potential DLAs. Where there is co-operation from the director, we can usually reach a settlement.
This would involve a full investigation into the director’s personal position, together with the completion of an income and expenditure statement.
If a settlement of the DLA is reached, the proceeds would be payable into the insolvent estate, and any amount over and above would be classed as a ‘write off’.
An important reminder here is that the ‘write off’ of any loan account may be taxable as income on the director’s Self-Assessment for the following year and should be detailed accordingly. This could have an impact on their tax band with consequential rate changes and specific advice should be sought.
It is the director’s responsibility to report any write-off amounts from a DLA to HM Revenue & Customs.
In conclusion, it is vitally important to be aware of obligations for directors when faced with an insolvent liquidation and we always encourage frank and transparent conversations between ourselves, the directors and their advisers. There is always a solution.
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