What are overdrawn director loan accounts and why are they a problem?

A director’s loan account records money taken from or lent to the company by directors. An overdrawn account arises when a director owes more to the company than they have put in. This becomes a serious problem in insolvency because the liquidator treats the overdrawn amount as an asset to be recovered for creditors. Directors may therefore be required to repay the money personally, even if they cannot afford to. Overdrawn loans are also closely scrutinised by HMRC, as they can sometimes be used to extract funds without paying the correct tax. If not repaid within nine months of year-end, additional corporation tax charges may apply. To avoid problems, directors should avoid excessive withdrawals, treat loans as temporary, and ensure proper tax compliance. In insolvency, an overdrawn loan account is often one of the first issues liquidators pursue.