A guide, not advice. This explains how things generally work. A licensed insolvency practitioner will tell you what applies to your company or to you.
What Happens to Money Owed to Directors in Liquidation?
Directors sometimes lend money to their company - particularly in the early days, or to bridge a cash-flow gap. If the company goes into liquidation and the director is owed money, what happens to that claim?
The answer depends on the type of debt and the director's position. In most cases, directors who are owed money recover little or nothing.
The General Position
A director who has lent money to the company is an unsecured creditor for that loan (unless they hold security, which is rare). As an unsecured creditor, they rank alongside suppliers and HMRC - after liquidation costs, preferential claims, and secured creditors. In an insolvent liquidation, unsecured creditors usually recover a small dividend or nothing.
Directors Who Have Loaned Money
If you have lent money to the company:
- You can submit a claim in the liquidation as an unsecured creditor
- You will only receive a dividend if there are sufficient funds after higher-ranking creditors are paid - which is rare
- You cannot simply take the money back before liquidation; doing so could be a preference or a transaction at undervalue, which the liquidator can challenge
Directors Who Are Owed Salary or Dividends
- Unpaid salary - if you are on the payroll, unpaid salary up to the preferential limit may be recoverable via the Redundancy Payments Service, alongside redundancy and holiday pay
- Unpaid dividends - declared but unpaid dividends are generally unsecured claims, and recover little
- Expense claims - reimbursement of expenses properly incurred on behalf of the company may be an unsecured claim
The Overdrawn Loan Account
If your director's loan account is overdrawn - you have taken more out than you were entitled to - this is the opposite situation: you owe the company money, and the liquidator will pursue repayment from you personally. This is a common and significant source of personal liability.
Can You Set Off?
In limited circumstances, a director may be able to set off money owed to them against money they owe (such as an overdrawn loan account). The rules on insolvency set-off are complex - take advice before assuming any set-off is available.
Speak to a Licensed IP
If you are owed money by a company entering liquidation, or worried about an overdrawn loan account, our Manchester-based practitioners will explain where you stand honestly and confidentially.