Here is a little known fact, but the ‘drawings’ you make as a Director, can become a debt that you owe back to your business.
Plenty of owners take money out of the business and assume it is wages. It’s your business right? Your money? Wrong. In the accounts it is often posted to the director’s loan account. If the company fails however, that balance can become the liquidator’s “low-hanging fruit” when it comes time to find funds to pay for the liquidation.
“If the books show you owe the company, expect a demand on day one. It is the easiest recovery,” says Liam Bailey, Managing Partner of O’Brien Palmer.
How people get caught:
✓ Personal expenses paid from the company and posted to the loan account.
✓ Irregular drawings with no employment agreement or payslips.
✓ Unreconciled loan balances that grow year after year.
✓ Tax not lodged or income not declared.
Can you defend a claim?
Sarah Scappello from Hicksons Hunt & Hunt explains: “Sometimes. If records are wrong, or there is a history of year-end adjustments that reclassify the loan to properly taxed income, we can argue the balance is not a true loan. Each case turns on evidence.”
WHAT HELPS:
✓ Consistent year-end journals converting drawings to salary or dividends, with tax paid.
✓ Employment agreement and payroll records.
✓ Clear narrative that payments were genuine business expenses, not private.
WHAT HURTS:
✓ No payslips, no journals, no tax.
✓ Years of mixed personal and business spending.
✓ Trying to fix everything after liquidation has started.
Clean-up steps you take now to ensure this doesn’t happen to you:
✓ Sit with your accountant and reconcile the loan account.
✓ Put an employment agreement in place.
✓ If you are a creditor of the company, gather proof of advances and consider security for any future funds.
✓ If a demand has arrived, get legal advice early. Negotiated, evidence-based outcomes are common.
“Treat the company like a separate person. Document money in and money out. The small cost now can save you five figures later,” says Sarah.
Need to Talk?
If you’re overwhelmed and need to understand your options, our team is here. We’ll explain your rights, your responsibilities, and help you take the first steps to protect you against any claims around the money that your business has paid you.
O’BRIEN PALMER (Insolvency)
📞 Call Liam Bailey: (61) 2 9232 3322
📧 Email: obp1@obp.com.au
HICKSONS HUNT & HUNT (Legal)
📞 Call Sarah Scappello: (61) 2 9391 3113
📧 Email: scappello@huntsnsw.com.au
Did you is the first part of our Director’s Loans series?
