Advice on establishing a directors loan

[EyeFilms]

I am about to start up a limited company with four other colleagues and am introducing a small amount of capital, equipment, contacts, etc. from my sole tradership (equivalent to about £10k).

My colleagues are not contributing anything materially to the start-up of the business.

We had considered dividing the shareholding of the company in a way that reflects the larger contribution on my part e.g. 40/15/15/15/15 (just an example) however we were advised to split the shareholder evenly and introduced my capital et al as a directors' loan which can be repaid i) at a specific point in time; or ii) over a given period of time.

As we are fast approaching the time of incorporation is anyone able to offer any advice on how to go about setting up this directors' loan and possibly advise of the implications for us as company directors and for the business as well?

Many thanks

Jon.

 

[M-C Hoare]

You can do it as a formal loan agreement if you want with repayment terms and interest, or you can leave it as an ad hoc loan which you keep a record of and withdraw from the business as and when the money is there.
The way we record it in our books it is have a ledger for each director/shareholder and record their loan amounts in there and then record the purchases which those funds bought in the purchase ledger -we use double entry bookeeping.
If you want a formal loan agreement, I would be happy to help draw this up (it wouldn't be expensive). But it doesn't particularly need to be complicated so you could do it yourselves but will obviously depend on the amount you anticipate loaning. The greater the amount, the more you would want the comfort of something professionally in writing.
There are no issues that I am aware of for the business or for you as a group of directors/shareholders, but obviously for you as an individual if the business doesn't make enough money to repay you, you will lose the money. That may be one more reason to have an agreement, so that in that situation you can insist on a contribution from the other shareholder to recoup some of your outlay.
It is very common practice to have shareholder/directors loans but if you still have any concerns about the logistics perhaps a quick word with your accountant would resolve any lingering issues.
Marie
JH Law

 

[KM-Tiger]

My colleagues are not contributing anything materially to the start-up of the business.

But they are presumably contributing something - time or expertise perhaps. It seems to me the real issue is do the five of you consider yourselves to be equal partners who are happy to equally share the profits and losses? I've said that as though you are to be a partnership, but the principle is the same for shareholders. Your cash and equipment has a simple monetary value, best dealt with by a director's loan, but if you are bringing contacts and goodwill, how have you assessed that value? Is that equal in value to other things your partners are bringing to the table?

I would also suggest that you seek good professional advice in drawing up a Shareholder's Agreement. This forum has heard many horror stories of directors falling out, and it's in those sort of circumstances that a well drafted Shareholder's Agreement can help everyone reach a resolution.

 

[Lyndon Wood]

Hi Jon

Directors loan is not allowed to be more than 5k if you breach you can go to jail !!!

Lyndon Wood

 

[KM-Tiger]

Hi Jon

Directors loan is not allowed to be more than 5k if you breach you can go to jail !!!

Lyndon Wood

I think you will find he was talking about lending to the company, not borrowing from it.

As an aside you can borrow more than £5K from your company, but the rules are trickier.

 

[EyeFilms]

Thanks for all the advice folks, really useful.

I am lending to the company, and yes, my colleagues are bringing a level of expertise et al. However we have agreed that my input exceeds theirs initially.

I am keen to have a pretty tight agreement because with five of us in the company it could easily go pear-shaped! Anyone who is willing to offer support in drawing up such an agreement please get in touch asap.

Thanks

Jon.

 

[M-C Hoare]

Under the new Companies Act 2006, the rules on loans to directors have been changed so £10k would not be a problem any more.
It seems to me that there are 2 issues:-
1. the director's loan to the company;
2. a shareholder agreement to establish the provisions which apply in certain circumstances (ie. one or more party wanting to leave, disputes etc.)
They are not necessarily the same thing.
There are places where you can get shareholder agreements off the internet (for a fee of course) but I don't know about the loan agreement.
Please do get in touch if you want it doing professionally.
Marie
JH Law

 

[Shahkti]

It isn't hard to find free or low-cost examples of both Shareholder Agreements and Director's Loan agreements on the Internet. Personally, I'd pay for extra advice and a bespoke version only if I wanted to do something unusual, and that would beg the question "why?".

If you take a loan from a bank and a Director gives a personal guarantee, the Bank will also insist on a debenture over the assets of the company.

If the Director gives a loan from his/her own pocket, in my experience the agreement often just covers that interest at x% is payable on the loan and the loan repayment terms.

So, to answer my own question "why would I want something different from a Directors loan agreement?", what I would ask for are the insertion of clauses that would give me preferential creditor status in the event of insolvency and company winding up.

It might be that everyone agrees that the "benefit in kind" makes for equal shares at the moment, but cash is still king and unsecured creditors get treated very equally (as in equally badly!) at the end of the company life, if it goes that way.

 

[Kevin Lucas]

You cannot insert any clauses that give you any kind of preferential treatment on a winding up. The priority of payment in a winding up is laid down in statute and cannot be changed by the contents of any agreement.

What you could do however, is to lend money to the company and secure it by way of a charge. If you did this then you would have some priority of payment over other creditors.

I would suggest seeking advice on the wording of the agreement and security documentation/charge in these circumstances, unless you can find something on the web. If it's not done properly or accurately then on a winding up you could find the insolvency practitioner rejecting your security leaving you with no 'preferential' treatment.

 

[One LUX]

Sorry to revive a very old thread, but...

It isn't hard to find free or low-cost examples of both Shareholder Agreements and Director's Loan agreements on the Internet.

I can't find anything free out there - any pointers?

How much would a sol charge for a basic shareholder agreement or director's loan agreement? (need both)

 

[suzlen]

When we initially started up the company my partner and I where both equal shareholders. To pay the bills my partner loaned money to the company and this for about 5 years. I found out that because of these loans, I am losing my 50% share holders' participation.

‘Control’ is widely defined, but basically it means the ability to exercise or acquire control, either directly or indirectly, over a company’s affairs. It includes, but is not limited to, the possession of, or the right to acquire, the greater part of the issued share capital or voting power of the company.
Control can also be established via loans to a company or rights over assets.Broadly, a participator is a shareholder.​

.

My contribution reflects in providing office space (not accounted for) and significant additional expertise which makes it possible for the business to exist and develop. Therefore I would like to find a solution to guarantee my 50 % share holding and eliminate the risk of being thrown out of the company on the basis of not being a participator on the same level as my partner.

Of course I accept that, in any case, my partner would be given priority in receiving full refund of the loans he gave to the company.

Looking forward to receiving your advice...