Director caught out by having to repay loan ‘on demand’

Directors need to be clear about repayment terms when borrowing money from their company or using their loan account.

Failure to do so could result in being obliged to pay back large sums before they are ready to do so, as happened in a recent case before the High Court.

The issue arose due to a complex arrangement whereby the director borrowed £131,000 from his company so he could buy shares in the company. The agreement was further complicated by his being involved in a second related company.

Both companies were restructured two years later. At this point, the director defaulted on a repayment for the loan. The company then demanded repayment of all the money it had lent the director, and £14,000 debited to his loan account.

The director argued that an email sent to him by a company representative when discussing the arrangements said the loan was not repayable upon demand, but upon a trigger event such as a share sale, which had not occurred.

He argued that the loan account sums had been paid on terms that they would not be repayable except out of dividends subsequently declared.

The High Court ruled against him. It held that the email was merely a broad outline of terms which would be subject to discussion later. There had been no subsequent discussion of repayment terms.

It meant no agreement about repayment could be inferred beyond that which followed routinely, namely that repayment was due upon demand.

There was also no evidence of an agreement that debits to the account would not be repayable until a dividend was paid. In any case, such a term would have been unenforceable. The sums on the loan account were therefore due for payment on demand.

Please contact us if you would like more information about the issues raised in this article or any aspect of company law on or 02920 345511.