Securing your Company Loans – Don’t Wait Until it’s too Late
By Jack Newton, Law Graduate, MST Lawyers
MST’s corporate lawyers have, particularly over the last few years, seen a rise in companies that have borrowed money from shareholders and/or directors, become insolvent and because of deficiencies in the loan document (or absence of any documentation), those shareholders and directors have lost significant sums of money and/or other assets because those loans were unsecured.
Often when shareholders and/or directors advance funds to a company, the transaction will often be seen as a capital or equity contribution. If the funds are intended to be a loan, this must be documented properly in order to avoid the appearance of a capital or equity contribution.
In practical terms, this means that shareholders/directors without properly documented loans are at risk of getting nothing when the company becomes insolvent and is wound up as a result of being the subject of unforeseeable litigation, for example.
To control this risk, it is important to have a properly drafted loan agreement between the company and the shareholder/director together with security documentation that will allow the shareholder/director to take security over the company’s assets. The shareholder/director should also register their interest in the company’s assets on the Personal Properties and Securities Register.
In addition, the danger of transactions being ‘clawed-back’ due to preference payment regulations means that directors and shareholders must take action as soon as possible to secure their position. Failure to do so may result in significant losses for the shareholder/director, and this action is a critical component of asset protection strategies that should be adopted by anyone in business.
By documenting your loan arrangement with your company, you will be a ‘secured creditor’ of the company, and will rank higher than other creditors. This means you are far more likely to see a return upon the insolvency of the company.