Director risk – loans to company

Directors often lend money to their company to fund expenses; either at the startup stage or during lean times. Most of the time, the loan is simply repaid to the director and that’s the end of it. However, if a company is wound up for insolvency, such transactions can expose directors to personal risk. This article is about what to look out for and how to protect against such risk.

“Voidable transactions”

Section 588FE of the Corporations Act enables a liquidator/creditor to ‘claw back’ certain transactions entered into before a company becomes insolvent. Usually, any transaction entered into in the 6 months before winding up is caught within this provision.

If a transaction was between the insolvent company and a “related entity” (such as a director or shareholder) the period in which a liquidator/creditor can claw back funds may sometimes extend back 4 years.

Example

  1. Director lends money to company (unsecured).
  2. Company repays loan to director over a few months.
  3. Company goes insolvent 3 years later.
  4. Liquidator appointed.
  5. Liquidator seeks to claw back repayments by company to director pursuant to section 588FE.

This is a very basic example and there are lots of steps in between.

What to do?

The director in the example above could potentially defeat a ‘claw back’ attempt by a liquidator if there was a loan agreement in place with a PPSA clause which allowed the director to register a security interest or charge over the company. The security interest/charge would also have to be registered on the PPSR before the date the company was deemed to be insolvent.

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Note: this article contains a very general and basic overview of the law and does not take into account personal circumstances. Do not rely on this article as advice. Instead, seek legal advice which takes into account your specific circumstances.