Overdrawn director's loan account: what the law says you owe

What an overdrawn loan account is

A director's loan account is the running record of money passing between a director and the company that is neither salary, dividend nor reimbursed expenses. When the director has put in more than they have taken out, the company owes the director and the account is in credit. When the director has taken out more than they have put in, the account is overdrawn and the director owes the company.

In an owner-managed company it goes overdrawn quietly. The director draws a round sum each month, the accountant treats it as a loan until the year end, and at the year end declares a dividend or votes a bonus to clear it. That works while the company has profits to declare and the paperwork is done. It stops working when the profits are not there, and the overdrawn balance then becomes a real debt with legal and tax consequences attached.

It is a debt owed to the company

The starting point is the one directors find hardest to accept. An overdrawn loan account is money the director owes the company, in exactly the sense that a customer with an unpaid invoice owes the company. The company is a separate legal person, its money is its own, and the director has no special status as a debtor because they also run it.

While the director controls the company, nobody calls the debt in, which is why it can sit in the accounts for years. The moment control passes to somebody else, whether a liquidator, an administrator, a buyer of the company or a co-shareholder who has fallen out with them, the debt is an asset of the company that the new controller is obliged to collect. That is the whole reason the account matters, and it is one of the routes to personal liability covered in our guide to when directors are personally liable.

Member approval for loans over £10,000

Section 197 of the Companies Act 2006 provides that a company may not make a loan to a director, or guarantee or give security for a loan to a director by somebody else, unless the transaction has been approved by a resolution of the members. Before the resolution a memorandum has to be made available to the members setting out the nature of the transaction, the amount of the loan and the purpose for which it is required, and the extent of the company's liability under any connected transaction. For a written resolution the memorandum goes to every eligible member with the resolution; for a resolution at a meeting it has to be available at the registered office for fifteen days before the meeting and at the meeting itself.

Section 207 excepts small loans. No approval is needed where the value of the loan, aggregated with any other relevant transactions, does not exceed £10,000. Credit transactions have a separate £15,000 limit. Both figures are in the Act and were unchanged on 22 September 2026.

In a company with one director who is also the only shareholder, the resolution is passed by that person, and what the section achieves there is a written record of the loan. But the resolution still has to exist, on paper, with the memorandum, and an overdrawn balance that drifted past £10,000 across a year of drawings was almost never approved in advance. That is the position most owner-managers are in.

What happens to an unapproved loan

Section 213 sets out the civil consequences. A loan made without the approval section 197 requires is voidable at the instance of the company, unless restitution is no longer possible, the company has been indemnified, or setting it aside would affect rights acquired in good faith by a third party. Whether or not it is set aside, the director who received the loan and any director who authorised it are liable to account to the company for any gain they made and, jointly and severally, to indemnify the company for any loss.

The exposure is on the director who took the money and on every other director who let it happen. A co-director has a defence if they show they did not know the circumstances constituting the contravention, and a director who received a loan on behalf of a connected person has one if they took all reasonable steps to secure compliance. Neither helps the sole director of a sole-director company.

In practice section 213 matters most in a dispute or an insolvency. A liquidator recovering an overdrawn account rarely needs it, because the debt exists anyway. A co-shareholder who wants the director out, or a buyer who has discovered the account in due diligence, uses it to put every director on the hook, and to shift the burden of explaining what happened onto the board.

The section 455 charge in outline

Section 455 of the Corporation Tax Act 2010 charges a close company to tax on a loan to a participator, which for present purposes means a shareholder or a director who is one, that is still outstanding nine months after the end of the accounting period in which it was made. The rate corresponds to the dividend upper rate of income tax for the year, and on 22 September 2026 gov.uk states it at 33.75 per cent of the outstanding amount for loans made on or after 6 April 2022. The tax is due on the day following the end of the nine months, alongside the company's Corporation Tax.

The charge is temporary in principle. Once the loan is repaid, written off or released, the company can reclaim the tax, with the relief due nine months and one day after the end of the accounting period in which the repayment happened. Interest paid on the charge cannot be reclaimed, and a claim has to be made within four years. HMRC also has rules against clearing the balance just before the year end and drawing it again just after: where a loan of £5,000 or more is repaid and a further £5,000 or more is borrowed within 30 days either side, the repayment is ignored, and where £15,000 or more is repaid with a further loan already arranged, the same applies. A loan of more than £10,000 at any point in the tax year is also treated as a benefit in kind on which the company must deduct Class 1 National Insurance.

That is as far as the tax section goes. The computation, the interaction with dividends and salary, and the timing of repayments to avoid the charge are for the company's accountant, who has the figures. The legal point is narrower: the charge is a real cost of leaving the account overdrawn, it comes out of the company's cash, and in an insolvency HMRC proves for it as a creditor while the liquidator pursues the director for the loan itself.

Writing the loan off

The company can release a director from the debt. The members resolve to waive it, the accounts record the write-off, and the accountant deals with the tax consequences for the company and the director.

What a write-off cannot do is survive an insolvency that follows it. A release of a debt owed by a director is a gift by the company to a connected person, and section 238 of the Insolvency Act 1986 lets a liquidator or administrator set aside a transaction at an undervalue made within two years before the insolvency began, with the company's insolvency at the time presumed where the other party is connected. The liquidator applies to have the release reversed, and the debt comes back. If the write-off was made when the company could not pay its creditors, it is also a breach of the directors' duty to consider creditors' interests, and the directors who voted for it face a claim under section 212 for misfeasance.

The second thing a write-off cannot do is come out of capital. Where the director is a shareholder, releasing the debt is a distribution to a member in substance, and section 830 of the Companies Act 2006 allows a distribution only out of profits available for the purpose. A company with no distributable reserves cannot lawfully waive a shareholder-director's debt, whatever the resolution says.

Dividends that were never lawful

The usual way of clearing an overdrawn account at the year end is a dividend. Section 830 permits a company to make a distribution only out of its accumulated realised profits less its accumulated realised losses. A dividend voted to clear the loan account in a year when the company had no distributable profit is unlawful, and the fact that the accountant booked it changes nothing.

Section 847 provides that a member who receives a distribution knowing, or having reasonable grounds for believing, that it is made in breach of the Act is liable to repay it to the company. A director-shareholder is taken to know the company's financial position, so the defence that they did not realise is seldom open to them. The effect is that the loan account was never cleared: the dividend is repayable, the balance is back where it was, and the tax consequences of both the loan and the dividend still have to be dealt with.

Interim dividends make this worse. An interim dividend is paid when the directors decide to pay it, and it cannot be backdated to a time when the company had profits. Minutes prepared in the following spring, recording dividends said to have been declared monthly through the previous year to explain drawings that were loans when they were taken, are a document a liquidator reads with particular care.

What a liquidator does with it

The overdrawn account is usually the largest and easiest asset in a small company liquidation. The liquidator has the company's books, the balance is stated in them, and the debtor is a known individual who has just signed a statement of affairs confirming the figure.

The liquidator writes demanding payment. If it is not paid, the ordinary debt recovery routes follow: a statutory demand and then a bankruptcy petition where the debt is large enough to found one, or a county court claim on the debt. A liquidator's fees are paid out of what is recovered, so there is every incentive to pursue it.

What the director can raise in answer is limited. A genuine credit on the other side of the account, such as unpaid salary or expenses properly incurred, can be set off if it is documented. A lawful dividend that was declared but never recorded against the account can be shown. Beyond that, the claims that it was always intended as remuneration, or that the accountant should have dealt with it, or that the company owed the director for years of underpaid work, do not reduce the debt.

Where the director cannot pay in full, liquidators will usually negotiate and take a view on what can realistically be recovered, but the negotiation starts from the whole balance and the director's own statement of their assets.

How to clear the account

Repaying it in cash is the clean answer and the only one that works in every situation. Where that is done before the nine-month point, the section 455 charge never arises.

A lawful dividend clears it where there are distributable profits. Check the reserves in the last accounts, declare the dividend properly with a board minute and a dividend voucher, and record the credit to the account on the date of the declaration. A salary or bonus clears it through PAYE, at a higher tax cost, but it works whether or not the company has profits. Expenses the director paid personally on the company's behalf can be credited if they are evidenced.

What does not work is a resolution to write it off in a company that has no reserves, a dividend declared in a loss-making year, or leaving the balance where it is on the assumption that nobody will ask. The liquidator, the buyer and the co-shareholder each ask, and each arrives with the same balance sheet the director has been looking at for years.

Frequently asked questions

Do I have to repay an overdrawn director's loan account?

Yes. It is a debt you owe the company, in the same way a customer with an unpaid invoice owes it. While you control the company nobody calls it in, but a liquidator, administrator, buyer or co-shareholder who takes control is obliged to collect it, and a liquidator will pursue it through a statutory demand, bankruptcy petition or court claim. The only defences are documented credits on the other side of the account or a dividend that was lawfully declared.

Does a director's loan need shareholder approval?

Under section 197 of the Companies Act 2006, yes, by a resolution of the members with a memorandum setting out the amount and purpose, unless the total of the loan and any other relevant transactions does not exceed £10,000, which is the exception in section 207. A loan made without approval is voidable under section 213 and the director must account for any gain and indemnify the company for any loss. In a sole-director company the resolution is a formality, but it still has to exist.

What is the section 455 tax charge?

A charge on the company under section 455 of the Corporation Tax Act 2010 where a loan to a shareholder-director is still outstanding nine months after the end of the accounting period in which it was made. On 22 September 2026 gov.uk states the rate at 33.75 per cent for loans made on or after 6 April 2022. The company can reclaim it once the loan is repaid, written off or released, within four years, but cannot reclaim interest. Your accountant should do the computation.

Can the company just write the loan off?

It can release the debt, but a write-off does not survive an insolvency. A liquidator can set it aside under section 238 of the Insolvency Act 1986 as a transaction at an undervalue made within two years, with the company's insolvency at the time presumed because you are a connected person, and the debt comes back. Where you are a shareholder the release is a distribution, so under section 830 of the Companies Act 2006 it also needs distributable profits to be lawful.

What if the dividend used to clear my loan account was unlawful?

Under section 847 of the Companies Act 2006 a member who receives a distribution knowing, or having reasonable grounds for believing, that it was made in breach of the Act must repay it. A director-shareholder is taken to know the company's position, so the defence is rarely available. The dividend is repaid and the loan account is back where it was. Interim dividends cannot be backdated to a period when the company had profits.

What happens to my loan account if the company goes into liquidation?

The liquidator demands it as a debt owed to the company, usually the first and largest recovery in a small company. If it is not paid the liquidator can serve a statutory demand and petition for your bankruptcy, or sue on the debt. Documented set-offs such as unpaid salary or expenses reduce it; arguments that it was always meant as pay do not. Where you cannot pay in full the liquidator may settle, but from the full balance and your own statement of assets.

Sources & further reading

• Companies Act 2006, section 197
• Companies Act 2006, section 207
• Companies Act 2006, section 213
• Companies Act 2006, section 830
• Companies Act 2006, section 847
• Corporation Tax Act 2010, section 455
• GOV.UK: director's loans, if you owe your company money
• Insolvency Act 1986, section 238

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 22 September 2026. AD Solicitors Limited is a recognised body regulated by the SRA (no. 8011228).