Overdrawn Director Loans: Why They’re Not Always What They Seem
Overdrawn director loan accounts (ODLAs) are a common feature in insolvent companies. On the surface, they appear straightforward, a director owes the company money. Often, the statement of affairs will list a simple debt, sometimes exceeding six figures.
But not all is as it seems.
Just because an ODLA appears in the books doesn’t make it accurate, enforceable or legally sound. In fact, many director loan balances can be reduced, challenged, or even struck out entirely with the right scrutiny.
This article explores how director loans become disputed liabilities, when you can contest the balance, and why accepting the figure at face value could be a costly mistake.
What Is an Overdrawn Director Loan Account?
An ODLA arises when a director withdraws money from the company outside of salary or dividend structures. This can happen:
- As informal or temporary drawings
- In lieu of salary to minimise tax
- Due to poor or inconsistent bookkeeping
- Through unrecorded personal use of company accounts
- As part of outdated or risky remuneration planning
In liquidation or administration, these drawings are usually treated as recoverable debts. Liquidators and Administrators are obligated to pursue repayment, whether the sum is £5,000 or £150,000.
But whether you’re actually liable for the figure claimed is another matter entirely.
Why ODLA Figures Are Often Inaccurate or Disputable
1. Inconsistent or Outdated Bookkeeping
Many loan balances are built on incomplete or unreconciled accounts. If you received salary that wasn’t recorded or dividends that were informally agreed, the ODLA may be artificially inflated.
2. Unlogged Business Expenses
If you paid company expenses on a personal card or were informally reimbursed, those amounts may be miscategorised as drawings, creating an overstated loan balance.
3. No Evidence of a Loan Agreement
Without a written agreement, board approval or defined repayment terms, the loan may be harder to enforce, especially if the company had multiple directors or informal processes.
4. Shared Accounts and Attribution Issues
Where two or more directors accessed shared accounts or company cards, it may be unclear who made specific transactions. If a liquidator cannot attribute the withdrawals, they may not hold up in court.
5. Misclassification Risks
Withdrawals may have been wrongly classified as loans when they should have been treated as salary (subject to PAYE) or dividends (potentially unlawful). Either way, the liability profile changes, and directors may have grounds to challenge how the balance was constructed.
What to Expect When a Liquidator or Administrator Pursues an ODLA
When a company enters liquidation or administration, one of the first steps for the insolvency office-holder is to examine the company’s financial records for assets or recoverable sums. That includes any overdrawn director loan account (ODLA) recorded in the books.
This process typically unfolds in several stages:
1. Loan Balance Extracted from the Company’s Accounts
The liquidator or administrator will review accounting records, director drawings, and bank transactions to identify funds taken by directors that were not recorded as salary or dividends. Where bookkeeping is incomplete or inconsistent, they may rely on draft figures or estimates to construct the ODLA.
2. Demand or Questionnaire Sent to the Director
Directors will usually receive a formal letter setting out the loan balance being claimed. This is often accompanied by a questionnaire requesting information about:
- The purpose of certain withdrawals
- Whether repayments were made
- How much, if any, was authorised as salary or expense reimbursement
- Any supporting documentation, such as board minutes or payslips
3. Pressure to Repay or Settle the Balance
If the director doesn’t respond or disputes the balance, the liquidator or administrator may escalate the issue. This can include:
- Threatening court action or director bankruptcy
- Issuing a statutory demand
- Applying to the court for a repayment order
- Using the ODLA as leverage to settle other claims or discourage further disputes
At this point, directors often feel the pressure mount, but a calm, evidence-led response can shift the conversation.
4. Potential Referral to the Insolvency Service
If the ODLA is large or suggests misconduct, for example, personal withdrawals during clear insolvency or poor financial oversight, the matter may be reported to the Insolvency Service. This could lead to director disqualification proceedings, particularly where the loan appears excessive, unauthorised, or concealed.
When Can a Director Challenge an ODLA?
You may have grounds to contest a director loan if:
- No formal loan agreement exists
- The figure relies on draft or incomplete accounts
- You made repayments that were not properly logged
- You can show that company expenses were miscategorised
- Other directors authorised or benefited from the same funds
Even if a balance remains, directors often succeed in negotiating reductions, agreeing settlements, or avoiding legal action by confronting inflated or inaccurate claims early.
Case Example: ODLA Reduced After Scrutiny
In a 2023 case, a retail business director faced a £74,000 ODLA claim from the liquidator. Upon closer review:
- £18,000 reflected unpaid salary
- £9,500 were legitimate company expenses
- £6,000 stemmed from a duplicated entry due to an accounting software error
After presenting evidence, the enforceable debt was reduced to just over £40,000, and a negotiated repayment was agreed, avoiding court and disqualification proceedings.
Don’t Accept the Number Without a Challenge
Director loan accounts often survive on assumption, not accuracy. In liquidation and administration, those assumptions become legal claims, unless you challenge them.
If you’re facing pressure over an ODLA, don’t rush to admit liability. With a clear financial review and proper challenge, many balances can be reduced, reclassified, or resolved on far better terms.
At IL Advisory, we help directors understand what they truly owe, and what they don’t.
Facing Pressure Over a Director Loan?
Don’t accept the number without a fight. We help directors:
- Review ODLA claims in detail
- Push back on inflated or incorrect balances
- Negotiate with liquidators/administrators to avoid escalation
- Protect your reputation and avoid personal liability
Call 020 7692 8456
Email info@iladvisory.co.uk
IL Advisory: Supporting Directors