When a company is placed in liquidation a Liquidator is required to sell or recover that company’s assets. The company’s assets can include things like cash at bank, motor vehicles and stock. However, a company’s assets also includes debts or loans owed to a company.

Where a debt or loan is owed by a related party, such as a loan to a director the loan is an asset which a Liquidator will seek to recover.

How does a director loan arise

A loan to a company’s director usually arises where a director has taken “drawings” from the company which have not been classified as wages or dividends. This type of loan is commonly referred to as a Division 7A Loan.

The loan will appear in the company’s Balance Sheet and a director will generally be required to sign a Division 7A Loan Agreement for the loan due to tax laws.

How can a Liquidator recover a director loan

A liquidator can recover a director loan just like they can any other debt owed to a company. This can include a Liquidator commencing legal action, obtaining a judgment and on occasion bankrupting a director for a director loan.

How can an insolvency practitioner help

When we meet with a director of an insolvent company we will review the company’s circumstances with them. If there are any director loans owed, we will inform the director of this and that they can seek to be recovered in a liquidation. The director can then make an informed decision about what to do, which may still be to liquidate a company or there may be other alternatives.

Advice and assistance

If you wish to discuss this article, or your circumstances, please don’t hesitate to contact Pearce & Heers at our Brisbane or Gold Coast  office and our experienced staff will be able to assist you.