Q&As

Where there is a situation whereby loans made by a director/shareholder into a company are intended to be short term for the purpose of payment of salaries in the event of cash flow issues, are they able to be repaid in priority to other loans into the company which may have been made prior to the short term loans without breaching any company law or fiduciary duties?

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Published on LexisPSL on 05/05/2017

The following Banking & Finance Q&A provides comprehensive and up to date legal information covering:

  • Where there is a situation whereby loans made by a director/shareholder into a company are intended to be short term for the purpose of payment of salaries in the event of cash flow issues, are they able to be repaid in priority to other loans into the company which may have been made prior to the short term loans without breaching any company law or fiduciary duties?

Where there is a situation whereby loans made by a director/shareholder into a company are intended to be short term for the purpose of payment of salaries in the event of cash flow issues, are they able to be repaid in priority to other loans into the company which may have been made prior to the short term loans without breaching any company law or fiduciary duties?

The validity or otherwise of repayments to a director or shareholder depends upon the circumstances of the company.

If the company is solvent, it is obliged to repay its debts in the usual course of its business, subject to the rights of creditors to pursue them for not doing so. There is nothing inherently wrong with the Board electing to repay loans from those ‘close to home’ before satisfying third party debts but the company should repay its debts within the relevant contracted terms of business. See Practice Notes: Directors’ duties: companies in financial difficulties and Directors’ duties: companies in financial difficulties.

More difficult issues arise and statute intervenes when the company is insolvent, beyond merely suffering cash flow issues. A company should not trade insolvent in any event, and doing so gives rise to a number of offences under insolvency and company legislation.

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