What is an overdrawn director’s loan account and why is it risky?

A director’s loan account records money directors borrow from or lend to their company. An overdrawn director’s loan account occurs when a director owes the company more than they have put in. This situation is particularly risky if the company becomes insolvent. During liquidation, the liquidator will seek repayment of the overdrawn loan as it is considered an asset of the company that should be returned to creditors. Directors who cannot repay may face personal financial difficulty or even bankruptcy. HMRC also closely scrutinises overdrawn loans because they can sometimes be used to extract company funds without paying proper tax. If the loan is not repaid within nine months of the year-end, the company must pay additional corporation tax, which increases the financial burden. To reduce risk, directors should avoid large or long-standing overdrawn loans and seek professional advice to structure remuneration properly. In insolvency, an overdrawn loan account is often one of the first issues investigated by a liquidator.