What Happens to a Director Loans or Drawings Account in a Liquidation?

What is a Director Loan or Drawings Account?

A Director Loans or Drawings account shows an amount owed by a director to the company.

This account typically appears as a company asset in the form of a Director Loan Account on the company’s balance sheet.

How does this occur?

 At Australian Company Liquidations, we typically encounter the following scenarios when dealing with Director Loan accounts:

  • The company’s accountant has advised that tax can be minimised to save cash flow by paying directors a small salary, then drawing further payments by putting it to a “loan account”;
  • A director has simply been drawing funds from the company to act effectively as their salary, but the payments have been reconciled to the Director Drawings or Director Loans in their financial accounts;
  • The company has genuinely loaned money to the director

What happens to the Director Loan Account if my company enters liquidation?

 If the company enters any form of insolvency process such as liquidation, then the loan is an asset recoverable by the Liquidator. This can result in the Liquidator commencing legal action against the director to recover the loan.

How can I prevent this?

  • Repay any debts that you personally owe to the company
  • Account for your obligations regarding PAYG tax when you take your salary and ensure you stay compliant with the Australian Taxation Office’s requirements
  • Discuss any concerns that you may have with an accountant or Registered Liquidator, who can point you in the right direction

Here at Australian Company Liquidations we have a team of accountants and liquidators who can provide you with confidential and tailored advice to suit the needs of your business. Be aware that Director Loans accounts may cause issues if the loan is not repaid and the company is subsequently placed in liquidation. Speak to our friendly team on 1800 981 070 today!