Insolvency Practitioners are reporting a sharp rise in cases involving Overdrawn Directors Loan accounts (DLAs) – a trend that reflects both the volume of corporate failures and the growing scrutiny of directors’ financial conduct. With high numbers of companies entering liquidation and increased regulatory enforcement following the misuse of Covid support schemes, DLAs have become a focal point in asset recovery and director accountability during liquidations.
This article outlines the key reasons why DLAs are now a hot topic, focusing on current statistics, legal provisions, and enforcement data.
Are Corporate insolvencies increasing?
According to the UK Insolvency Service, the overall corporate insolvency trend remains at a high level, with corporate insolvency numbers in the first six months of 2025 being above those in the second half of 2024. In June 2025, Creditors’ Voluntary Liquidations (CVLs) accounted for the vast majority of corporate insolvencies and accounted for 78% of all insolvencies.
While these figures do not directly indicate an increase in overdrawn DLAs, they reflect a broader environment in which more directors are facing scrutiny over their financial conduct. In CVLs, insolvency practitioners routinely examine directors’ loan accounts. Where the account is overdrawn, it is treated as an asset of the company, and the director is required to repay the balance.
What can be the outcome of Covid loan abuse? Director Disqualification
The Insolvency Service’s enforcement report for 2024–25 confirmed 1,230 director disqualifications, with 736 bans directly linked to misuse of Covid support schemes, including Bounce Back Loans (BBLs). In many cases, directors transferred BBL funds into their DLAs or used them for personal expenses without proper documentation or board approval.
This has triggered a wave of investigations into directors’ financial conduct, with DLAs forming a central part of the inquiry. Where misuse is identified, directors face not only repayment demands but also disqualification under the Company Directors Disqualification Act 1986.
What are shareholder approvals and voidable loans?
Under current rules, any loan to a director must be authorised by a shareholder resolution.
Failure to obtain approval renders the loan voidable at the company’s discretion, and in insolvency, the liquidator may demand full repayment.
Despite this clear requirement, many SMEs operate informally, with directors drawing funds without formal approval or documentation. In liquidation, these drawings are reclassified as loans, and we often find that directors are surprised to find themselves personally liable.
Reclassification of drawings and illegal dividends
Directors frequently attempt to reduce their DLA balance by declaring interim dividends and offsetting them against the account. However, if the company lacks sufficient distributable profits, these dividends are unlawful under part 23 of the Companies Act 2006.
Insolvency Practitioners are increasingly challenging such transactions, especially where dividends were declared retrospectively or without proper board minutes. The result is that the DLA remains overdrawn, and the director is liable to repay the full amount.
Why is poor record-keeping such a big risk?
A recurring theme in insolvency investigations is the lack of proper accounting records. Directors’ Loan Accounts are often poorly maintained, with inconsistent entries, missing repayment schedules, and no formal loan agreements.
This creates significant risk for directors. In the absence of clear documentation, the liquidator is entitled to treat the entire balance as repayable. Moreover, poor record-keeping is a common ground for Director Disqualification, as highlighted in the Insolvency Service’s enforcement updates.
Voluntary dissolution and post-dissolution investigations
Some directors attempt to dissolve their companies informally via Companies House, bypassing formal liquidation. However, if the company has outstanding debts – including overdrawn DLAs or unpaid BBLs – the Insolvency Service may intervene.
In 2024, the government expanded its powers under the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, allowing retrospective investigation of dissolved companies. This has led to a rise in disqualification proceedings and recovery actions targeting directors who failed to address their DLAs before dissolution.
What are Bankruptcy restrictions and the personal consequences?
Where directors are unable to repay their DLAs and enter personal bankruptcy, they may face Bankruptcy Restrictions Orders (BROs) if misconduct is identified. These orders can last up to 15 years and severely limit the individual’s ability to act as a company director or manage financial affairs.
The Insolvency Service has confirmed that BROs are being used more frequently in cases involving DLA misuse, particularly where directors failed to maintain records or used company funds for personal gain.
How can Insolvency Practitioners help with Directors’ Loan Accounts?
Overdrawn DLAs are no longer a niche technical issue – they are now central to insolvency investigations, asset recovery, and director’s have to be accountable. With corporate insolvencies remaining high and enforcement activity intensifying, directors must ensure that any drawings from the company are properly documented, legally authorised, and supported by distributable profits.
At Antony Batty & Company, we regularly advise directors facing scrutiny over Directors’ Loan Accounts. If a company is in financial difficulty and the director(s) is worried about a possible overdrawn DLA, these are some of the key things to do:
- Stop drawing funds informally.
- Review your DLA balance with your accountant.
- Avoid declaring dividends without profits and clear documentation, and
- Seek advice from a Licensed Insolvency Practitioner as early as possible.
If liquidation is already underway:
- Be open about the overdrawn DLA.
- Provide full records and co-operate with the Insolvency Practitioner.
- Explore repayment or settlement.
Why is taking early advice so important?
At Antony Batty & Company, we have many years of experience advising Directors regarding DLAs. We understand how quickly a seemingly minor issue can become a major liability. We are always willing to listen and where possible will try and work through a solution without resorting to legal action where possible.
“When liquidation is the only remaining option, it is essential that businesses and directors act quickly and receive sound advice from their accountants and are then referred to us promptly. This helps to avoid the pitfalls of overdrawn directors’ loan accounts and unlawful dividends, which can lead to costly, protracted and highly stressful outcomes.” – Antony Batty
We have helped hundreds of directors negotiate settlements, avoid court action, and understand their responsibilities clearly. If you are unsure about your position, we are here to help.
Contact us today. One conversation could save you months of stress – and potentially £thousands in personal liability.
