Director’s Loan Account Repayment Demand: What Evidence Should Be Checked?

A Director’s Loan Account repayment demand can feel urgent and intimidating.

The letter may state that a fixed sum is due, that payment is required quickly, and that further action may follow if the director does not respond. Where the company is in liquidation, the demand may come from a liquidator, insolvency practitioner, solicitor, recovery agent or assignee of the claim.

The worst response is usually to ignore it.

The second worst response is to accept the balance without checking the evidence.

A Director’s Loan Account demand should be reviewed carefully before repayment is agreed. The key question is not simply whether a figure appears in the accounts. The question is whether the amount demanded is properly supported, properly calculated and realistically recoverable.

Start with the demand itself

The first document to check is the demand letter.

It should be reviewed for:

• The name of the company

• The name of the liquidator or party making the demand

• The amount claimed

• The date by which payment is requested

• The basis of the claim

• Whether the demand relies on accounts, ledgers or other records

• Whether interest, costs or fees have been added

• Whether the demand threatens court action, statutory demand action or bankruptcy proceedings

• Whether the demand asks for payment in full or invites proposals

The demand letter is not the evidence by itself. It is the starting point.

The director should then check what documents support the amount being claimed.

The Director’s Loan Account ledger

The main evidence is usually the Director’s Loan Account ledger.

This should show the movement of money between the director and the company. It should identify debits, credits, opening balances, closing balances and any adjustments made during the relevant period.

The ledger should be checked for:

• The opening balance

• The closing balance

• The dates of transactions

• The description of each transaction

• Whether each debit is properly explained

• Whether each credit has been applied

• Whether repayments are recorded

• Whether salary, dividends or expenses have been posted correctly

• Whether there are manual adjustments

• Whether there are duplicated entries

• Whether unexplained balances have been carried forward

A repayment demand is much weaker if the ledger does not clearly explain how the final figure has been reached.

Opening balance evidence

Opening balances are often overlooked.

A Director’s Loan Account may show a balance brought forward from a previous year. If that opening balance is significant, the director should ask what supports it.

Questions to ask include:

• Where did the opening balance come from?

• Was it taken from previous accounts?

• Was it reconciled against earlier records?

• Are the earlier ledgers available?

• Does the director accept the opening balance?

• Were any historic credits or repayments omitted?

• Was the opening balance ever explained to the director?

An unsupported opening balance can distort the entire claim.

Bank statements

Bank statements are important because they show what money actually moved.

The Director’s Loan Account ledger should be checked against the company bank statements where possible.

This can help identify:

• Payments made to the director

• Payments made on behalf of the director

• Transfers from the director back to the company

• Payments to third parties

• Business expenses incorrectly treated as personal drawings

• Personal payments incorrectly recorded as business expenditure

• Missing credits

• Duplicate entries

• Transactions with unclear descriptions

The bank records may support the liquidator’s position. They may also reveal errors in the ledger.

Salary, dividends and expenses

Not every payment to or for a director is automatically a loan.

Some payments may relate to salary, dividends, expenses, reimbursement, mileage, subsistence, business costs or other legitimate company expenditure.

The supporting records should be checked to see whether entries have been treated correctly.

Relevant documents may include:

• Payroll records

• Dividend vouchers

• Board minutes

• Expense claims

• Receipts

• Invoices

• Mileage records

• Accountant correspondence

• Management accounts

• Tax records

• Bookkeeping notes

If a payment has been wrongly treated as a loan, the balance may be overstated.

Credits and repayments

Credits matter as much as debits.

A Director’s Loan Account demand should be checked to ensure all credits have been included.

This may include:

• Cash paid back to the company

• Bank transfers back to the company

• Salary credited to the loan account

• Dividends credited to the loan account

• Expense reimbursements reversed

• Personal funds used to pay company liabilities

• Director-funded company expenses

• Corrections made by the accountant

• Contra entries

• Set-offs or agreed adjustments

A balance can be materially wrong if repayments or credits have been missed.

Year-end accounts

The company’s accounts may show a Director’s Loan Account balance, but the accounts should still be checked carefully.

Important questions include:

• Which year-end accounts are being relied upon?

• Were the accounts final or draft?

• Were they approved?

• Did the director sign them?

• Did the accounts identify the Director’s Loan Account separately?

• Was the balance shown as a debtor, loan, related party balance or other amount?

• Do the accounts match the underlying ledger?

• Did later records change the position?

Accounts are important evidence, but they do not always tell the full story.

Management accounts and bookkeeping records

The demand may rely on management accounts, bookkeeping exports or accounting software records.

These should be checked for accuracy and completeness.

Issues can arise where:

• The bookkeeping was not kept up to date

• Transactions were posted to the wrong account

• Personal and company spending were mixed

• Bank feeds were not reconciled

• Manual journals were added without explanation

• Accountant adjustments were made after the event

• The records changed between draft and final accounts

• The director was not shown the underlying entries

The quality of the bookkeeping can affect the strength of the claim.

Manual journals and adjustments

Manual journals can materially change a Director’s Loan Account balance.

They should be reviewed carefully.

A director should ask:

• Who posted the journal?

• When was it posted?

• What was the reason for it?

• What documents support it?

• Was it approved?

• Does it correct an error or create a new balance?

• Was the director told about it?

• Does it match the bank records?

Unexplained manual adjustments should not be accepted without review.

Interest, costs and additional charges

Some demands include more than the principal balance.

The letter may add interest, costs, recovery fees, legal fees or default charges.

These should be checked separately.

The director should ask:

• What is the principal amount?

• Has interest been added?

• What interest rate is being used?

• What period is interest being claimed for?

• What contractual or legal basis is relied upon?

• Have recovery costs been added?

• Are the costs fixed, estimated or already incurred?

• Are the additional charges recoverable?

A director should not assume that every additional amount demanded is automatically due.

Evidence of authority

It is also important to check who is making the demand and on what basis.

The director should understand whether the demand is being made by:

• The liquidator

• A solicitor acting for the liquidator

• A recovery agent

• An assignee

• A purchaser of the debt

• A joint venture partner

• Another instructed party

Where the claim has been assigned or transferred, the director may need to see evidence of the party’s authority to pursue the debt.

This does not necessarily remove the claim, but it helps confirm who is entitled to demand payment and on what basis.

Affordability and recoverability evidence

Evidence is not only about the balance.

Where money may be owed, affordability and recoverability also matter.

A director may need to prepare evidence showing:

• Income

• Essential living costs

• Dependants

• Property position

• Mortgage or rent

• Available equity

• Existing debts

• Employment or business position

• Savings

• Assets

• Ability to raise third-party funds

• Realistic monthly payment capacity

This evidence can be important in settlement discussions.

A liquidator may demand full payment, but the practical outcome may depend on what can realistically be recovered.

Avoid making admissions too early

When requesting evidence, the director should avoid unnecessary admissions.

A response should not casually say that the debt is accepted unless the director has reviewed the position and intends to admit the amount.

It may be better to confirm that the demand is being reviewed, that supporting documents are required, and that the director’s position is reserved pending receipt of the evidence.

The wording of the response matters.

A badly worded reply can weaken the director’s position before the evidence has been checked.

The evidence checklist

Before accepting a Director’s Loan Account repayment demand, the director should consider requesting or reviewing:

• The full Director’s Loan Account ledger

• Transaction breakdown

• Opening balance records

• Company bank statements

• Management accounts

• Statutory accounts

• Bookkeeping exports

• Accountant working papers

• Manual journal details

• Payroll records

• Dividend documentation

• Expense records

• Repayment evidence

• Credit entries

• Interest calculations

• Costs calculations

• Assignment or authority documents

• Any correspondence relied upon

• The basis of any threatened enforcement action

This does not mean every case will require every document.

The purpose is to identify what is needed to understand and test the claim.

The right first response

The right first response to a Director’s Loan Account repayment demand is usually controlled, calm and evidence-led.

The director should not ignore the demand, but should also avoid accepting the amount without review.

A sensible first response may:

• Acknowledge receipt

• Confirm the matter is being reviewed

• Request the documents relied upon

• Ask for a transaction breakdown

• Reserve the director’s position

• Avoid admitting the balance

• Ask for time to respond properly

• Indicate that affordability may need to be considered

The aim is to move the discussion away from pressure and towards evidence.

Speak to Director Protect before accepting the balance

Director Protect helps directors respond to Director’s Loan Account repayment demands, liquidator correspondence and overdrawn loan account claims.

We review the evidence, test the balance, identify challenge points and help directors assess settlement and affordability options.

If you have received a Director’s Loan Account repayment demand, do not accept the balance until the evidence has been checked.

Need help reviewing a Director’s Loan Account demand?

If you have received a repayment demand or liquidator correspondence, Director Protect can review the position and help you understand your options before you respond.

Contact Director Protect.