Director Alert: Securing Director Loans

by Hank De Jonge 19th of September, 2023

Director Alert: Securing Director Loans

De Jonge Read often sees situations where a related party (e.g. director or family member) lends considerable sums of money to a company without taking a security interest relating to their loan. These loans are necessary because the bank will not provide any more funding and the business is out of financing options. This can result in the related party ending up as the major lender, advancing more funds than the business’s bank, but they often have no security at all which places them in a risky situation.

If we could say one critical thing to business brokers and business owners, it would be to help secure any such loans on the Personal Property Securities Register, more commonly known as the PPSR. The PPSR is an official government register which is a public noticeboard of security interests in personal property that is managed by the Registrar of Personal Property Securities. Taking this step can make an enormous difference to the outcome if the business becomes unable to continue.

As a secured creditor, the lender is entitled to be repaid before any unsecured creditors. Further, this avoids any potential preference payment claims.

Real-Life Case Study: Roger + Company Loan

case study - director loans

Roger was speaking with his business broker about a recent loan he had made to his company. Roger’s broker knew the value of having security for the loan so referred the client to de Jonge Read for an obligation and cost-free assessment of Roger’s situation. de Jonge Read recommended that:

A written loan agreement be prepared, covering issues such as events of default, triggers for repayment, the interest rate to be applied, and the method of calculating interest;
A security interest to be taken over the company and registered;
An acknowledgment that future lending would be subject to the same agreement up to an agreed limit amount; and
Evidence be maintained to show that the funds were received by the company and the source of those funds (such as bank statements from the lender and borrower).

Fortunately, Roger engaged de Jonge Read to implement those recommendations. Fast forward to the end of 2022 and Roger’s company had to consider some formal insolvency options due to the longer-term effects of Covid on the business. The business suffered a slowdown in sales during the Covid period and whilst the business had returned to normal, Roger had incurred an insurmountable debt to unsecured creditors, predominantly the Australian Taxation Office (ATO)

At that time, de Jonge Read devised a strategy for Roger that included a business restructure (sale of the business to a related entity) for commercial value and because Roger was the first-ranking secured creditor (based on the security he had taken out), the majority of the purchase price was simply offset against his security interest. In this case, taking his broker’s advice saved Roger hundreds of thousands of dollars.

If you see a loan from a related party on a balance sheet or know a company director considering loaning additional funds to their company or asking a family member for assistance, please encourage them to seek advice from de Jonge Read first. There are numerous complex rules about the timing of registration and the effectiveness of a security interest and de Jonge Read are happy to advise based your circumstances.

Tags: finance selling financial statement business owners business brokers