Protect Your Directors Loan Account with a Debenture

Hello %%First Name%%

I wanted to bring this to your attention now as it is one of those key planning points that should be addressed now and not when it is too late.

When you put money into your company it will usually be in exchange for shares or as loan by you to your company, often referred to as a Directors Loan Account. A main advantage of lending the money is that it can be repaid to you far more easily than if you have subscribed for shares.

However, if you have a Directors Loan Account with your company, then should your company get into difficulty and even go into receivership or liquidation, then you would not have any priority over any other creditors and so may get very little of it back.

An important way to help avoid this happening is by use of a debenture.

A debenture is simply a legal contract between your Limited Company and the lender of the money to the company (you). It will provide for normal loan arrangements such as repayment dates and interest but will also allow the debenture holder (you) to put the company into liquidation and to recover the loan made from the sale of the company's assets.

In this situation there is a pecking order of who gets their money back first. The key point is that...

Fixed charge holders such as debenture holders
have priority over unsecured creditors

As a result you will ensure you receive your money back before them and that also means before HM Revenue and Customs get anything. Unsecured creditors often get very little back.

It’s bad enough a business failing but there is no need for you to be even worse off and see other creditors getting their hands on all the money that you invested into the business. If you try to put this into place just before your company is about to fail it will almost certainly be too late.

From a tax planning angle it's also worth noting that having the company pay interest to you on the loan is a tax efficient way of extracting funds from your company as there is no national insurance due on these payments.

For more advice on whether a debenture is appropriate to you or for help and assistance with any of your accountancy and tax needs, please give me a call. I'm very happy to visit you without charge for a consultation to discuss how we could help you further.