Company In Liquidation with Overdrawn DL

[Honung]

[England]
My company of 16 years went into liquidation earlier in the year (Aug).

The DL account is sitting at around £105,000, debts for the company were around £90,000

The company had a 15k bounce back loan, but that was in full in the account. A small amount of stock and cash was left in the business.

I had prepared myself mentally for personal bankruptcy.

I have no assets, personal debt of around £15,000, I live in rented accommodation with my wife and our disabled daughter. I am employed but on minimum wage with Universal Credit support since Covid.

I can't make a substantial offer against the DL, I can probably come up with 2-3k through friends at a push but no more than that realistically.

Is personal bankruptcy a guarantee in this instance?

Thanks for any insights.

 

[UK Contractor Accountant]

personal bankruptcy a guarantee in this instance?

looks like it when the £105K becomes income subject to Taxation when the Liquidator writes it off and no longer pursues recovery.

 

[Paul Norman]

A £105K overdrawn directors account will attract a big bill. I think you are correct to assume personal bankruptcy is a possibility here, and to get professional advice on the matter.

But the first issue is to get the company's insolvency dealt with, and to follow the advice of the liquidator.

As an aside, a comment to the readers of this forum. Stop overdrawing your director's loan accounts.

 

[Honung]

As an aside, a comment to the readers of this forum. Stop overdrawing your director's loan accounts.

This will sound stupid, but had no idea what it was. I have always been on the ball with things but accounts were always handled by accountants and I didn't understand the implications.

Lesson learned.

I am more wondering if they will take the bankruptcy route as it will not result in any benefit or recovery of funds.

Thanks and yes people please don't make the mistake I made

 

[ChrisCallaghan]

To be honest I think most liquidators would write this off as not recoverable.

 

[Ian J]

I am more wondering if they will take the bankruptcy route as it will not result in any benefit or recovery of funds.

it isn't necessarily just to recover monies as it's a form of punishment otherwise we'd all be at it

 

[Honung]

it isn't necessarily just to recover monies as it's a form of punishment otherwise we'd all be at it

I understand that, but that isn't in the best use of any funds available

This is more what I am wondering, thank you for taking the time to reply

 

[WaveJumper]

A £105K overdrawn directors account will attract a big bill. I think you are correct to assume personal bankruptcy is a possibility here, and to get professional advice on the matter.

But the first issue is to get the company's insolvency dealt with, and to follow the advice of the liquidator.

As an aside, a comment to the readers of this forum. Stop overdrawing your director's loan accounts.

It seems to be a common "problem" just recently in threads, one would think their accountant would be flagging this up immediately but perhaps I am being naive in these matters

 

[Mr D]

This will sound stupid, but had no idea what it was. I have always been on the ball with things but accounts were always handled by accountants and I didn't understand the implications.

Lesson learned.

I am more wondering if they will take the bankruptcy route as it will not result in any benefit or recovery of funds.

Thanks and yes people please don't make the mistake I made

Bankruptcy has benefits to you. Not so much them.

 

[Mr D]

I understand that, but that isn't in the best use of any funds available

This is more what I am wondering, thank you for taking the time to reply

The tax bill on £105k untaxed personal income will be considerable.

 

[Chris Ashdown]

You have the option to make yourself bankrupt, you don't have to let the IP do it, though it would be wise to talk to someone like the Citizens advice to understand the full implications

Nearly £200,000 will ring alarm bells on how you let it grow that much without going insolvent a fair time ago

 

[ChrisCallaghan]

It seems to be a common "problem" just recently in threads, one would think their accountant would be flagging this up immediately but perhaps I am being naive in these matters

It's always been an issue. A lot of directors only see their accountant once a year... for year end accounts. When I speak with a director their last set of accounts could be 18 months ago, with no overdrawn directors loan account showing.... a lot can happen in 18 months.

Some also ignore their accountants, and there are accountants who don't advise/care about the issue.

 

[Chris Parkman]

From speaking to HMRC a lot of liquidators do not always report the writing off of directors loans, and do not formally sent a letter saying that it has been written off. Therefore it is by no means certain that the tax liability will fall due.
You should speak to the liquidator, discuss your personal circumstances, then take some independent personal advice on your options from a Licensed Insolvency Practitioner.
It is quick and easy to petition for your bankruptcy, you an do it at any time, therefore you have time to make an informed decision. It is not something that you should rush into.

 

[Honung]

It seems to be a common "problem" just recently in threads, one would think their accountant would be flagging this up immediately but perhaps I am being naive in these matters

The business has been running for a long time, with 4 separate accountants. All chartered, all proper firms.

At no point did any of them sit down and explain the consequences. I was upset when I found out, you pay a lot of money to specialists and expect them to explain things.

I suspect because I have always been switched on, people made assumptions.

Ultimately my fault, the buck stops here I accept that.

 

[Honung]

Nearly £200,000 will ring alarm bells on how you let it grow that much without going insolvent a fair time ago

It's not quite as simple as that, the DL was over a period of 10+ years.

The business had a high turnover every month, when things were on a high it was in excess of a £100k a month, suppliers accounted for about 40k, although we had been in special measures with them for 12 months, working together and reducing the debts. The rest was a loan who refused to support us in anyway following the pandemic.

Things had been manageable until Covid, but it just got to the point that we hit a wall.

Everything was documented from day one, so I could show why we carried on trading, we also had reduced the level of debt over the period, suppliers were all informed. The liquidator has no issue with how I handed everything from the conversations I have had so far. The business was my life, I put everything into it, I didn't want to see it fail. My health would have been much better had I walked away at the start instead of trying to keep it afloat.

The elephant in the room is the DL, which as I had said in other posts was down to me not understanding, signing accounts off with not fully understanding everything. I am disappointed in the accountants but it's still me being naive. Every year we had tax bills we paid, I assumed everything was covered.

Having spoken with other small business owners, many have also said they have OD DL's and didn't understand the ramifications of this.

 

[Honung]

Some also ignore their accountants, and there are accountants who don't advise/care about the issue.

I am afraid the accountants I had used are the former. I had no idea

 

[Honung]

You should speak to the liquidator, discuss your personal circumstances, then take some independent personal advice on your options from a Licensed Insolvency Practitioner

The liquidator was informed at the beginning. I was pretty much suicidal to be honest, I saw no way out and had let my family down. He did reassure me and talk me through everything.

I have come to terms with going personally bankrupt, I have personal debts which crucify me every month but I know I can pay them off over time. I also have no issue with them being written off, they are with cards and banks who are screwing me into the ground with interest.

I would rather not go down the bankruptcy route, I feel ashamed and embarrassed but ultimately the decision is not mine. I was just posting to see if there was any slim chance that would not happen.

Thank you for taking the time to reply.

 

[Honung]

Thank you everyone for your feedback.

I appreciate everyone of you for taking time out of your day to reply.

I hope that others read this thread and do not make the same mistakes I made.

 

[ChrisCallaghan]

The business has been running for a long time, with 4 separate accountants. All chartered, all proper firms.

At no point did any of them sit down and explain the consequences. I was upset when I found out, you pay a lot of money to specialists and expect them to explain things.

I suspect because I have always been switched on, people made assumptions.

Ultimately my fault, the buck stops here I accept that.

It really pains me when this happens. Most of the accountants I work with are well versed with the risks of directors loans, but as your experience bares out, sadly not all accountants treat this issue seriously.

To go back to your original question, in my experience most IPs will not pursue an overdrawn directors loan account when there is no chance of recovery (i.e. director does not own property and can demonstrate they have no disposable income). BUT it is ultimately up to the IP. I would suspect it would depend how busy that IP is. A busy IP's time is better spent pursuing cases that will lead to a financial return for their time and creditors.

I myself don't have much experience when it comes to the tax implications (i.e. the undeclared income you have had) but my understanding is that HMRC are rarely made aware of this.

Ultimately making yourself bankrupt is a judgement call. The IP may accept that the directors loan is not recoverable, and HMRC may never pursue you for the undeclared income..... and so no need to declare yourself bankrupt. However with bankruptcy comes the peace of mind that both of these issues will be behind you. Just be mindful that you will be automatically made subject to a one year director's ban.

I have personal debts which crucify me every month but I know I can pay them off over time. I also have no issue with them being written off, they are with cards and banks who are screwing me into the ground with interest.

If you have other personal debts causing you concern, then all the more reason to consider bankruptcy. I know your experience with IPs will not be great now, but before you apply to make yourself bankrupt it would be sensible to take professional personal debt advice, either from an IP firm or charity like StepChange.

 

[ChrisCallaghan]

Thank you everyone for your feedback.

I appreciate everyone of you for taking time out of your day to reply.

I hope that others read this thread and do not make the same mistakes I made.

Good luck however you choose to move forward!

 

[Ian J]

I myself don't have much experience when it comes to the tax implications (i.e. the undeclared income you have had) but my understanding is that HMRC are rarely made aware of this.

Doesn't the liquidator have to file some form of statement of affairs and if so won't the DL be listed as an unrecoverable asset?

 

[ChrisCallaghan]

Doesn't the liquidator have to file some form of statement of affairs and if so won't the DL be listed as an unrecoverable asset?

It is stated in the liquidators report, which is lodged at Companies House.

 

[UK Contractor Accountant]

but my understanding is that HMRC are rarely made aware of this.

its Self Assessment Tax Returns - its the responsibility of the Directror to declare as income.

If the DLA has built up over the years it may be the case that S455 holding tax at 32.5% may have already been paid by the company. That's if the Accountants declared it on the CT Return!

 

[ChrisCallaghan]

its Self Assessment Tax Returns - its the responsibility of the Directror to declare as income.

If the DLA has built up over the years it may be the case that S455 holding tax at 32.5% may have already been paid by the company. That's if the Accountants declared it on the CT Return!

Certainly sounds like the OP should sit down with an accountant if he does not declare himself bankrupt.

 

[japancool]

It costs money to declare that you have no money.

 

[scstock]

As an aside, a comment to the readers of this forum. Stop overdrawing your director's loan accounts.

Accountants need to stop recommending this jolly wheeze to save tax unless they are sure their clients fully understand how it works and what the consequences are when it goes wrong.

 

[Chris Ashdown]

Unfortunately its easy to blame the accountants, when often they are just employed to do book keeping and year end

When you run a company you need to fully understand the company accounts and how well you are trading just like you need to understand company law, selling regulations, health and safety and employment laws

To many think they can ignore the basics and just sell goods or services and someone else will do the donkey work and keep them informed all the time, quite a high expectation on sub contractors

People do the same with banks somehow not understanding that banks are not your friend just another business trying to make money, you ask for a loan they say yes or no but just expect the loan to be repaid

If only people read some basic books on starting a company before they just jump in

 

[scstock]

Unfortunately its easy to blame the accountants, when often they are just employed to do book keeping and year end

My accountant made me feel like I was being stupid by paying myself a regular salary and therefore all the PAYE/NI deductions. You don't want to do that, they said - look at all the tax you're wasting! Aren't we clever accountants knowing how to save you all this money?

So I went down the Dividend route. It was all fine until it wasn't. Thankfully I have pulled it back now, older and wiser.

 

[Red Wood]

Ignore filing dates, go dark and eventually it may go away. Put yourself first. HMRC are unlikely to discover the DL.

Worth a shot.

 

[Spongebob]

Ignore filing dates, go dark and eventually it may go away. Put yourself first. HMRC are unlikely to discover the DL.

Worth a shot.

Very often it does indeed go away. It’s amazing how frequently the best course of action is to do nothing at all.

 

[Ian J]

Ignore filing dates, go dark and eventually it may go away. Put yourself first. HMRC are unlikely to discover the DL.

Worth a shot.

Bank robbers frequently don't get caught either so why not give that a shot whilst you're at it

 

[UK Contractor Accountant]

Have a read for yourself

The Bounce Back Loan Scheme: an update - NAO report

This report provides an update on the Bounce Back Loan Scheme.

www.nao.org.uk

 

[Mr D]

Bank robbers frequently don't get caught either so why not give that a shot whilst you're at it

They usually get caught if they keep robbing banks. Odds catch up with them.
Mistakes happen, people talk, someone spends money they should not have ....
Police aren't daft.

Do it once maybe you get away with it. Do it 20 times without a mistake.... ? Unlikely.

 

[Red Wood]

Bank robbers frequently don't get caught either so why not give that a shot whilst you're at it

Bit of a stretch that comparison.