{"id":190165,"date":"2024-09-01T22:16:21","date_gmt":"2024-09-01T21:16:21","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=190165"},"modified":"2024-09-06T00:38:09","modified_gmt":"2024-09-05T23:38:09","slug":"overdrawn-directors-loan-accounts-legal-implications","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/disputes-litigation\/overdrawn-directors-loan-accounts-legal-implications\/","title":{"rendered":"Overdrawn Directors&#8217; Loan Accounts: Legal Implications"},"content":{"rendered":"\n<p>When you run a business, there are many rules you need to be aware of, some of which concern financial transactions regarding your limited company. You must understand and abide by legal company rules to avoid litigation or problems with your company. As a <a href=\"https:\/\/legalvision.co.uk\/corporations\/director-shareholders\/\">director of your business<\/a>, there are times when you may engage in financial transactions with your company. This can also apply to other company directors and can take place through a director\u2019s loan account. However, sometimes, this can become an overdrawn director&#8217;s loan account. This article explores the legal implications of personal liability, shareholder approval, and remedies for overdrawn directors&#8217; loan accounts.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What is a Director\u2019s Loan Account?<\/h2>\n\n\n\n<p>A director\u2019s loan account records financial transactions between directors and the company. However, it does not include the following:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>salaries;<\/li>\n\n\n\n<li>dividends;<\/li>\n\n\n\n<li>expenses being repaid; or<\/li>\n\n\n\n<li>any money a director has loaned or paid into the company in the past.<\/li>\n<\/ul>\n\n\n\n<p>A director\u2019s loan account can, for example, be one of the following:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>zero if a director has not taken any money from the company apart from the above transaction; or<\/li>\n\n\n\n<li>in credit if they have lent money to the company, such as to <a href=\"https:\/\/legalvision.co.uk\/business-sale-purchase\/key-points-asset-purchas\/\">purchase assets<\/a>, meaning they are a creditor of the company.\u00a0<\/li>\n<\/ul>\n\n\n\n<p>However, a director\u2019s loan account could also be an overdrawn director\u2019s loan account.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Does it Mean if a Director\u2019s Loan Account is Overdrawn?<\/h2>\n\n\n\n<p>If a director\u2019s loan account is overdrawn, this means that a director has borrowed money from the company which totals more than they have lent it and is not money taken as:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>salaries;<\/li>\n\n\n\n<li>dividends;<\/li>\n\n\n\n<li>expenses being repaid; or<\/li>\n\n\n\n<li>any money a director has loaned or paid into the company in the past.<\/li>\n<\/ul>\n\n\n\n<p>As the director owes the company money when their account is overdrawn, the director&#8217;s account is a company asset. This means the company can recover it if it wishes.<\/p>\n\n\n\n\n<a href=\"#content-next\"\n   class=\"block p-4 mt-10 text-xl font-bold text-center text-white no-underline bg-gray-800 rounded-t-xl\">\n    Continue reading this article below the form\n    <i class=\"text-xl fa-regular fa-arrow-down\"><\/i>\n<\/a>\n<div class=\"px-6 pt-10 pb-12 mb-10 text-center bg-gray-100 rounded-b-xl sm:px-12 test\">\n    <div class=\"mb-8 text-2xl font-bold text-orange\">\n        Need legal advice?\n        <br>\n        <span class=\"text-lg not-prose\">\n                            Call <a href=\"tel:+448081968584\" class=\"not-prose\">0808 196 8584<\/a> for urgent assistance.\n                <br>\n                Otherwise, complete this form, and we will contact you within one business day.\n                    <\/span>\n    <\/div>\n\n    \n\n<div class=\"not-prose flex justify-center text-left gform_input_bg_white    \">\n    <script>\nvar 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Naturally, this makes sense, as a director should not borrow from the company when the company cannot meet its current financial obligations.<\/p>\n<\/div>\n\n\n\n<p>In addition, if a company lends to a director, causing an overdrawn director account, the following rules must be complied with:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>those detailed in the <em>Companies Act 2006<\/em>; and\u00a0<\/li>\n\n\n\n<li>the company&#8217;s Articles of Association.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>The <em>Companies Act 2006<\/em> says that if a <a href=\"https:\/\/legalvision.co.uk\/disputes-litigation\/directors-loans-rights-and-obligations\/\">company loans to a director,<\/a> which will result in an overdrawn director&#8217;s account, the company members must approve this where the amounts are over \u00a310,000 and under \u00a350,000 through a resolution. This includes:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>if making the loan to a director of any holding company; and&nbsp;<\/li>\n\n\n\n<li>if guaranteeing or giving security for a loan to one of the company directors from any other person.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">When Does a Company Director Act Unlawfully?<\/h3>\n\n\n\n<p>As a company director, you must understand when you may have acted unlawfully regarding any overdrawn director\u2019s account. Here are some circumstances which could render a company director as acting unlawfully regarding an overdrawn director loan:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>where you fail to obtain the shareholders agreement required for an overdrawn director account, meaning you have breached Section 213 of the Companies Act 2006; or<\/li>\n\n\n\n<li>where you are charged with misfeasance through a Section 212 claim under the Insolvency Act 1986 during insolvency proceedings as you breach your fiduciary duties.<\/li>\n<\/ul>\n\n\n\n<p>The second scenario can arise when, for example, you have not acted in the company&#8217;s interest.  For instance, if you have borrowed money when your company cannot afford to lend. <\/p>\n\n\n\n<p>You may be able to defend a misfeasance claim if you can prove you acted:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>honestly; and&nbsp;<\/li>\n\n\n\n<li>you unknowingly committed the breach; or<\/li>\n\n\n\n<li>when committing the breach you tried to preserve the interests of all parties involved.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>If you are found guilty of misfeasance, the following implications could arise:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>a court could order you to pay back money to the company;<\/li>\n\n\n\n<li>you could lose your legal right to be a company director and be disqualified for any period between 2 and 15 years; or<\/li>\n\n\n\n<li>you could be declared bankrupt as you personally owe the debt to the company.&nbsp;<\/li>\n<\/ul>\n\n\n    <div class=\"my-7 lg:my-10 border-y-2 border-gray-100 py-7 lg:py-10 flex flex-col sm:flex-row items-start gap-10\">\n                    <img decoding=\"async\" class=\"w-52 mx-auto my-0! rounded\" src=\"https:\/\/img.legalvision.com.au\/wp-content\/uploads\/sites\/4\/2024\/07\/16031510\/Screenshot-2024-07-16-at-12.14.57%E2%80%AFPM.png\" alt=\"Front page of publication\"\n                 loading=\"lazy\" width=\"208\" height=\"298\">\n                <section>\n            <div class=\"text-2xl font-bold\">UK Directors Duties<\/div>\n            <div class=\"body-text\">\n                <p>Understand your role as a director and how to meet your legal obligations. Download our free guide today.<\/p>\n            <\/div>\n            \n\n<a href=\"https:\/\/go.legalvision.co.uk\/uk-directors-duties.html\" class=\" block px-5 py-3.5 max-w-fit bg-orange button__hover transition rounded text-white font-bold text-lg no-underline uppercase leading-tight text-center\" target=\"\" rel=\"\">Download Now<\/a>        <\/section>\n    <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">Key Takeaways<\/h2>\n\n\n\n<p>As a company director running your business, you must be aware of overdrawn director\u2019s loan accounts. A director\u2019s loan account records the financial transactions between a director and your company. These do not include certain transactions such as salaries and dividends. Directors&#8217; loan accounts can be in credit or at zero levels. When a director&#8217;s loan account is overdrawn, they owe the company more money than they have put into it, becoming an asset of the company.&nbsp;<\/p>\n\n\n\n<p>A director can only have an overdrawn directors account where rules in the Companies Act 2006 have been complied with and the company\u2019s Articles of Association. A company director acts unlawfully if, for example, they do not obtain shareholder approval for a loan of a specific count as defined in the Companies Act 2006. A company director could also commit misfeasance when having an overdrawn director&#8217;s loan, which could result in, for example, a company director&#8217;s disqualification.&nbsp;<\/p>\n\n\n\n<p>If you need help understanding overdrawn director\u2019s loan accounts, our experienced <a href=\"https:\/\/legalvision.co.uk\/services\/disputes-litigation\/\">disputes and litigation solicitors<\/a> can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on <a href=\"tel:+448081968584\" class=\"AVANSERnumber dynamic-number\">0808 196 8584<\/a> or visit our <a href=\"https:\/\/legalvision.co.uk\/membership\">membership page<\/a>.<\/p>\n<div class=\"not-prose m-feedback-prompt\">\n    <!-- Thumbs up\/down bar -->\n    <div class=\"m-feedback-prompt__main\">\n        <div class=\"m-feedback-prompt__title\">Was this article helpful?<\/div>\n        <div>\n            <!--span class=\"m-feedback-prompt__button--text\">Thanks!<\/span-->\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--yes\"\n                    data-analytics-link=\"feedback-prompt:yes\" aria-label=\"Agree\">\n                <i class=\"fa-regular fa-thumbs-up fa-3x\"><\/i>\n            <\/button>\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--no\"\n                    data-analytics-link=\"feedback-prompt:no\" aria-label=\"Disagree\">\n                <i class=\"fa-regular fa-thumbs-down fa-3x\"><\/i>\n            <\/button>\n        <\/div>\n    <\/div>\n\n    <!-- Feedback form -->\n    <div class=\"m-feedback-prompt__form\">\n        <div class=\"m-feedback-prompt__form--thanks \">\n            <div>Thanks!<\/div>\n            <p>\n                We appreciate your feedback \u2013 your submission has been successfully received.            <\/p>\n        <\/div>\n        <form id=\"contact-form\" class=\"m-feedback-prompt__form--form\" action=\"\" method=\"post\">\n            <input type=\"hidden\" id=\"authenticity_token\" name=\"authenticity_token\" value=\"9eb4f72322\" \/><input type=\"hidden\" name=\"_wp_http_referer\" value=\"\/api\/wp\/v2\/posts\/190165\" \/>            <input value=\"https:\/\/legalvision.co.uk\/disputes-litigation\/overdrawn-directors-loan-accounts-legal-implications\/\" type=\"hidden\" name=\"currenturl\"\n                   id=\"currenturl\">\n            <input value=\"Overdrawn Directors&#8217; Loan Accounts: Legal Implications\" type=\"hidden\" name=\"currenttitle\"\n                   id=\"currenttitle\">\n            <label>\n                <!-- display on thumbs-up -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--yes\">\n                    Can you tell us <span class=\"font-semibold\">why<\/span> you found it helpful?\n                <\/span>\n\n                <!-- display on thumbs-down -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--no text-lg\">\n                    How can we better improve this article?\n                <\/span>\n                <textarea name=\"feedbackmessage\" id=\"feedbackmessage\" required><\/textarea>\n            <\/label>\n\n            <div class=\"m-feedback-prompt__form--error\" id=\"form-submit-error\"><\/div>\n            <button id=\"submit-contact-form-button\" type=\"submit\" name=\"commit\" class=\"m-feedback-prompt__form--submit\"\n                    data-analytics-link=\"feedback-prompt:submit\">\n                Submit            <\/button>\n        <\/form>\n    <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>When you run a business, there are many rules you need to be aware of, some of which concern financial transactions regarding your limited company. You must understand and abide by legal company rules to avoid litigation or problems with your company. As a director of your business, there are times when you may engage<a href=\"https:\/\/legalvision.co.uk\/disputes-litigation\/overdrawn-directors-loan-accounts-legal-implications\/\">Continue reading <span class=\"sr-only\">&#8220;Overdrawn Directors&#8217; Loan Accounts: Legal Implications&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13326,"featured_media":3190,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"182659,189193,173439,3317,175462,188672","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[26],"tags":[20,100,112,2156],"class_list":["post-190165","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-disputes-litigation","tag-small-business","tag-articles-of-association","tag-company-director","tag-directors-loan-2"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Overdrawn Directors&#039; 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