When is a director’s loan not a loan? When it is equity!
If a loan from a director to a company does not have appropriate written terms and conditions, then Section 237 of the Companies Act can deem it ‘subordinate to all other indebtedness of the company’. A ‘loan’ that has legally become subordinate to all other creditors may be repaid only after all other creditors are repaid.
In cases where the loan has become subordinated by virtue of Section 237 or the directors legally subordinate the debt, then it must be disclosed in the ‘financed by’ section of the balance sheet and not shown in ‘creditors’. Moving the loan from creditors to equity clearly improves the look of a balance sheet and can ensure that an entity meets the capital adequacy requirements required by some regulators.
Where the loan is from a holding company, subordinating the loan will move it from creditors to equity in the subsidiary company and from debtors to ‘investment in subsidiary’ in the holding company. This is an attractive disclosure option for some groups.
Contact Brian Dignam Director OSK for further details on Director's Loans or in relation to audit and accounting services or call 01 439 4200.
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