What to do if the accounts show directors loans or drawings owing to the company

Often a company’s financial accounts will show “directors loans”. That is an amount owing by a director to the company. So it is an asset of the company that is recoverable by a company or the company’s liquidator.

Directors Loans – How the problem develops

The history will be that:

  • the company has been making profits in the past and the accountants advise that tax can be saved by paying directors a small salary with the balance of drawings being put to a “loan account”, then the company strikes troubled times; or
  • a director has simply been drawing funds from the company, effectively being a salary, but the bookkeeper has been coding that as “Drawings” or “Directors Loans” in the accounts; or
  • it is a genuine loan from a company to the director.

If the company enters any form of insolvency administration, such as liquidation or voluntary administration, then a liquidator will, quite reasonably, require the amount to be repaid to the company.

What can you do?

Options available include the following:

  • Repay the debt you personally owe to the company.
  • Offset any loans the directors have made into the company (this is called set off).
  • Take your full salary but reduce the cash you take out of the business to gradually offset the account. So pay yourself $5,000 per month but take $1,000 only with the balance being set against the loan account. Remember the company will need to pay PAYG on the full $5,000.
  • Discuss the matter with your external accountant.
  • Use a Voluntary Administration to come to an arrangement where all parties are better off.