Q&As

A company is loaning money to a director/shareholder. Can the company take security over (a) the shares owned by the director in the company itself and (b) the director’s receivable under a loan note issued by the company? How can such security be enforced?

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Produced in partnership with Brian Cain
Published on LexisPSL on 14/11/2018

The following Banking & Finance Q&A Produced in partnership with Brian Cain provides comprehensive and up to date legal information covering:

  • A company is loaning money to a director/shareholder. Can the company take security over (a) the shares owned by the director in the company itself and (b) the director’s receivable under a loan note issued by the company? How can such security be enforced?
  • Creating the security
  • Share security
  • Loan note
  • Enforcing the security

Creating the security

There are two elements to this Q&A. Firstly, can the director create security over the shares and loan notes they own in/from the company to secure a liability due to the company. As the shares/loan notes are assets of the director they can be the subject of security created by them to any third party.

The second element is the question as to what type of security can be taken by the company in relation to those assets.

Share security

It is not possible for the company to own its own shares and therefore a legal mortgage of the shares will not be available. Although, special provisions of the Companies Act 2006 allow share buyback and the holding of shares in treasury they would not appear to be applicable to this situation. However, an equitable mortgage over the shares could be created as this would leave the director as the registered holder (see Practice Note: Taking security over shares).

Loan note

It is not possible for the same person to be a creditor and debtor of the same debt. ‘As a matter of substance an obligation by a man to pay himself…is one which is in fact not an obligation in the eye of the law’; Ellis v Kerr

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