When a company enters liquidation, directors often assume the business is “finished” and they can simply move on.
In reality, liquidation is often just the beginning of the dispute.
One of the most common (and most shocking) issues directors face is receiving a formal letter of demand from a liquidator claiming they owe the company a substantial sum sometimes hundreds of thousands, and in some cases millions of dollars.
These demands usually relate to one thing: director loan accounts.
If you are a director, shareholder, or business owner and you have ever drawn money from your company outside of wages or dividends, you may be exposed.
This article explains what a director loan account is, why liquidators pursue them aggressively, and what directors should do if they receive a demand.
What is a Director Loan Account?
A director loan account is an accounting record showing money owed between a director and the company.
It can operate in two directions:
- the company owes the director money (for example, where the director has personally funded company expenses); or
- the director owes the company money (for example, where the director has withdrawn funds for personal use).
The second category is the one that causes problems.
If the company’s records show that a director owes money to the company, then legally it is treated as a debt payable to the company unless it can be properly explained, offset, or disputed.
How Do Director Loan Accounts Arise?
Director loan accounts often arise informally. Many directors do not even realise they have one until liquidation.
Common examples include:
- paying personal expenses from the company account
- drawing money from the company without formally recording it as salary
- transferring money between related entities without documentation
- using company funds to pay mortgages, rent, private school fees, travel or vehicles
- using company credit cards for mixed business and personal purposes
- withdrawing funds with the intention of “paying it back later”
- bookkeeping errors or incomplete reconciliations
In many small and medium businesses, this occurs simply because directors treat the company as an extension of themselves.
That approach can be survivable while the business is profitable.
It becomes dangerous the moment insolvency arises.
Why Do Liquidators Pursue Director Loan Accounts?
When a company goes into liquidation, the liquidator’s role is to:
- identify company assets
- investigate transactions and conduct
- recover money for the benefit of creditors
- pursue claims where appropriate
A director loan account is often one of the most attractive assets to pursue because:
- it is usually recorded in the company’s balance sheet
- it is treated as a straightforward recoverable debt
- it often involves large amounts
- it does not require complex litigation to identify
- it can lead to negotiated recovery or settlement
Put simply: if the company’s records show the director owes money, the liquidator will treat that amount as recoverable.
Can a Liquidator Sue a Director for a Loan Account?
Yes.
If the liquidator can establish that the director owes the company money, the liquidator may commence proceedings to recover the debt.
That may include:
- issuing a statutory demand (if the director is a company)
- filing a debt recovery claim
- pursuing judgment enforcement (including bankruptcy proceedings)
- seeking orders requiring disclosure of assets
- seeking freezing orders in serious cases
Even if the director believes the figure is incorrect, the liquidator may still commence proceedings unless the director can produce evidence and a coherent explanation.
Are Company Accounts Enough Evidence?
Often, yes.
A liquidator will commonly rely on:
- balance sheets
- general ledger entries
- loan account journals
- MYOB/Xero records
- bank statements
- director expense schedules
- tax returns and BAS records
Many directors assume the liquidator must prove the debt “like a contract claim”.
In practice, the company’s internal records can be strong evidence, particularly where they were maintained during the period the director controlled the business.
If the director disputes the loan account, they must usually provide documents showing why it is wrong.
Common Defences and Disputes to Director Loan Account Claims
Not all liquidator demands are correct. Loan accounts are frequently messy and sometimes wrong.
Common issues include:
1. The amount includes legitimate business expenses
A director may have paid expenses personally or withdrawn funds that were business-related.
2. The loan account is not properly reconciled
Bookkeeping errors are common, especially where directors run multiple entities.
3. The loan account should be offset
If the company owed the director money in other respects, the director may argue set-off.
4. The entries are not supported by evidence
Some loan accounts are simply journal entries prepared later without proper source documents.
5. The loan account is incorrectly categorised
Payments may have been intended as wages, dividends, or reimbursements, but were never formally documented.
6. There are tax complications
Loan accounts can also trigger Division 7A issues (for companies), and tax treatment can complicate disputes.
However, disputing a loan account requires evidence, not opinion.
If you cannot prove what the withdrawals were for, you are at risk.
Why Directors Should Take These Demands Seriously
Many directors make the mistake of ignoring liquidator correspondence or assuming it is a “standard letter” that will go away.
It usually does not.
If you fail to respond, the liquidator may escalate quickly by:
- commencing proceedings
- seeking costs orders
- issuing bankruptcy notices
- seeking judgment enforcement
If the amount is significant, the liquidator may also consider other recovery actions, including insolvent trading claims, unfair preference claims, or voidable transaction claims.
A loan account demand is often the first step in a broader recovery strategy.
What Should You Do If You Receive a Liquidator Demand?
If you receive a letter demanding repayment of a director loan account, you should act quickly and strategically.
Step 1: Do not ignore it
Liquidators are officers of the Court and generally proceed methodically. Silence is often treated as refusal.
Step 2: obtain the financial records
You will likely need:
- full MYOB/Xero file extracts
- bank statements
- loan account ledger reports
- invoices supporting withdrawals
- accountant workpapers (if available)
Step 3: determine whether the amount is accurate
Many demands are based on a balance sheet figure that may not be reconciled.
Step 4: prepare a written response with evidence
A proper response should identify:
- what is admitted
- what is disputed
- why it is disputed
- what documents support the dispute
Step 5: negotiate early if appropriate
If liability exists but the director cannot pay the full amount, early negotiation may result in:
- settlement discount
- structured repayment terms
- agreement not to pursue bankruptcy
However, negotiation should be handled carefully. Poorly worded admissions can be used against you.
Preventative Advice: How Directors Can Avoid Loan Account Exposure
The best time to address a director loan account is before insolvency.
Directors should consider:
- cleaning up financial records and reconciliations
- properly documenting director drawings
- ensuring wages and superannuation are correctly recorded
- declaring dividends lawfully and with accountant advice
- avoiding informal transfers between entities
- obtaining legal and accounting advice early if cash flow is deteriorating
Directors often delay dealing with these issues because the business is “too busy”.
Unfortunately, insolvency law does not reward delay.
Director Loan Accounts and Insolvency: A Common Litigation Trigger
At Boss Lawyers, we frequently act for directors and business owners facing:
- liquidator demands
- loan account recovery proceedings
- insolvent trading allegations
- voidable transaction claims
- director penalty exposure
- shareholder and partnership disputes arising from business collapse
Loan account claims are often legally and commercially complex, particularly where multiple entities, trusts, and related parties are involved.
A strong response can often prevent the matter escalating into formal litigation.
Need Advice on a Liquidator Loan Account Demand?
If you have received a demand from a liquidator alleging you owe money under a director loan account, you should obtain advice immediately.
The earlier you respond with evidence and strategy the more options you will have.
Boss Lawyers advises directors, shareholders and business owners in Brisbane and throughout Australia on insolvency disputes and commercial litigation.
📞 Contact us to discuss your position confidentially.
