Home – New Forums Money matters Can directors loan directly result in insolvency?

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  • #987959
    Darren Smith
    Member
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    Hi All,

    I was reading the following posts about director’s loans which definetely helped my understanding, however would like some clarification around whether director’s loans can result in insolvency?
    http://www.flyingsolo.com.au/forums/money-matters/13397-director-loan-company.html

    Scenario is:
    1. Company is registered with 1000 x $1 shares as initial equity from sole director. This is placed in company bank account
    2. Company has a single customer paying $5 a month at this point
    3. Company has expenses that are paid for by director from his personal credit card (let’s say $2000 worth of expenses)
    4. Director records this in books against the “Directors Loan” account with no written loan agreement

    Questions:
    1. Is this scenario okay?
    2. Is company insolvent in this scenario (because liabilities exceed assets by $1000 immediately, or $995 after first month)? More specifically – is the director seen as trading whilst insolvent in this scenario?
    3. Is it acceptable to have money loaned by the director to the company without a loan agreement?

    Cheers
    Darren.

    #1164975
    Dave Gillen – Former FS Concierge
    Keymaster
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    Hey Darren,

    Welcome aboard the forums and good luck with your question!

    Great to have you here, and hopefully we’ll see you around. :)

    Dave

    #1164976
    James Millar
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    A good summary of current position on this is …

    Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279 the company owed a debt to its director, which was not subject to a formal agreement. The director gave evidence that he would not, in the immediate future, demand payment of the debt. The Court held that:

    in the absence of any term for payment the debt was payable on demand; and
    a debt payable on demand does not, for the purposes of solvency, become legally due and payable until demand is made;
    White J held that:

    “Solvency is essentially a cash flow test. Whilst the whole of the company’s financial position is relevant to determining its solvency, the company is not insolvent merely because its liabilities may exceed its assets.”

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1164977
    Darren Smith
    Member
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    Thanks for the welcome, Dave!

    And thanks, James, for the answer (and reference)! Much appreciated.

    Cheers
    Darren.

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