Directors’ personal loans: Issues that arise if you get into financial difficulties

Bestival co-founder and DJ Rob da Bank has successfully defended TicketLine Network’s £650,000 claim that it loaned him money personally, and that he failed to pay it back when his company went into administration in 2018.

Directors’ personal loans: Issues that arise if you get into financial difficulties

Bestival co-founder and DJ Rob da Bank has successfully defended TicketLine Network’s £650,000 claim that it loaned him money personally, and that he failed to pay it back when his company went into administration in 2018. This raises some interesting, but not uncommon, issues that arise when companies with financial difficulties borrow to try to save themselves. 

First, and perhaps obviously, if a limited company takes out a loan in its name it is liable to the lender not its directors. Except in exceptional circumstances, that remains the case if the company ends up in administration or liquidation. However, many lenders won’t lend to limited companies without security  and insist on personal guarantees that kick-in if the company fails to pay or becomes insolvent and give the lender a direct route to pursue a director and their assets personally.  Alternatively, and as TicketLine tried to argue, a lender may prefer to lend to a director personally because of their company’s parlous state.

Who the lender has lent the money to should always be recorded in writing to avoid disputes over who is liable to repay it, and when. Any related guarantees must also be clear and spell out when a guarantor’s liability is triggered as well as what they are guaranteeing. This is because it is all too easy for a creditor to claim that a director has given an ‘all monies’ guarantee rather than one limited to a specific sum.

The decision to borrow also needs care. Directors must take their statutory duties into account (as well as any matters covered by an applicable shareholders’ agreement) when they are considering a potential loan and its terms. 

Directors’ statutory duties include promoting their company’s success and exercising reasonable skill and care (for example in relation to securing commercially realistic terms). These duties must be balanced against the uncodified duty to consider a company’s creditors and act in their interests when directors know, or should know, that a company is, or is likely to become, insolvent. That exercise can be difficult and external advice may well be needed to protect a director’s position and avoid personal liability for breach of duty. 

A director who opts to borrow in their own name if their company can’t raise funds is undoubtedly taking a risk. The terms on which the company will repay them must be properly recorded.  Formalities for a transaction with their company also need to be followed, to protect their position in any future insolvency – to minimise the risk of repayments being challenged and recovered by a liquidator or administrator. The injection of the borrowed money (and any repayments) should also be properly recorded in the company’s accounts and shown against any existing director’s loan account.

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Helen Young
Helen Young
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