Informal Arrangements – Personal Loan from company directors

Published: 09/11/2022 By Hannah McCormack

This is the second to last option in our informal arrangements series, we have been suggesting alternatives to insolvency and next up is a Personal Loan from the Company Director. Using their own assets, if available, directors can provide a cash injection into their own company. The loan from the director could ease a bad cash flow situation and / or get the company back on track. The director would be able to charge interest on the amount which was lent to the company until it is repaid in full. However, this type of loan would only be repaid once all other creditors have been paid first.

Making this sort of loan to what is potentially a struggling business, is a risk for a director as its their personal assets on the line if the turnaround and success of the business does not happen. This could be a suitable option for a shareholder of the company, where there is confidence of the long term success of the business meaning the loan would eventually be repaid with interest if required.
With regards to legislation in Insolvency, as mentioned above there are restrictions which inhibit the ability of a company to repay anyone closely associated with it such as directors and members of their family. The priority in which things should be paid states creditors will always rank before those closely associated with the company. During uncertain times, if a director decided to repay themselves prior to creditors this could be seen as breaching their duties as a director. This would then trigger an insolvency holder such as an administrator or liquidator to recover these funds from the director to distribute evenly among any outstanding creditors.

As with all informal options there are risks but as long as you are seeking professional advice at all times and ensure you are working in the best interests of creditors we often find a turnaround and rescue of a struggling business is possible.
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All of our informal arrangement blogs can be found on our informal arrangements webpage , we find just speaking to us puts all of our clients minds at ease and often we can provide suggestions they may not have considered.