During pre-appointment discussions with company directors we often discover that the directors or their related entities owe large amounts to the company by way of a loan account. We also identify numerous loans owed to companies in circumstances where we are appointed as Liquidators by Court Order.
Directors’ loan accounts are generally recorded in the company’s financial statements as an asset, or sometimes as a negative liability, and they are recoverable as a debt due to the company. Where there is no loan agreement or other such document in place the loan will generally be recoverable at call, meaning it is immediately repayable on demand.
Directors’ loans commonly arise as a result of company directors taking drawings from the company or the company paying expenses on behalf of the directors. A loan will not arise in circumstances where funds paid to or on behalf of the director are accounted for as a wage and PAYG Tax is withheld from the wage and remitted to the Australian Taxation Office.
Once a company which is owed a loan by its directors is placed in liquidation the loan is recoverable by a Liquidator of the company. This often results in a Liquidator taking action to recover the loan, including in some circumstances commencing legal proceedings against the directors.
Company directors and accountants should therefore be cautious in the manner in which they treat payments made to or on behalf of a company’s director, with the knowledge that if such payments are accounted for as a loan then this will cause problems for the director if the loan is not repaid and the company is subsequently placed in liquidation.