Director loans – can they be recalled anytime?

It’s not uncommon for Directors or family members to loan money to a proprietary limited company which they are on the board of or where they are related to the major shareholders.  In most of these cases the Director is also a representative of the shareholder.  In a lot of cases, there is no express written terms of the loan and where there are multiple directors that represent all equity holders, they have all contributed funds equally.  Subsequently the question often arises as to whether or not the loan is repayable on demand.

Are there express terms of the loan?

Where there is a document evidencing the terms of the loan such as a Directors’ Resolution or a formal contract, then the issue will be determined by the express terms contained in the respective document.

The question is perhaps more difficult when there is no express document to provide evidence of the express terms of the loan and the terms by which it is to be repaid.

What are the terms of the loan?

In VL Finance Pty Ltd v Legudi [2003] VSC 57 (Legudi) one of the issues to be decided was whether there were loans made by Legudi Freehold Properties Pty Ltd (Properties) to members of the Legudi family for the purpose of acquiring preference shares in Legudi & Sons Pty Ltd (Sons).  A second question was whether the cause of action was statute barred.

There was no formal loan agreement per se, however the loans were recorded in the accounts of each respective company.  In the case of Properties the loan was recorded as a “current asset” as the accountant treated such loans as being “payable at call”.  The financial statements of both Sons and Properties also showed the loans as being current.

Nettle J at 39 found that in the absence of any stipulation as to the date of payment, the debt will be repayable on demand.  This was held to be consistent with Gleeson v Gleeson where Bryson J provided that:

‘generally, a simple contract of loan which does not provide for the time of repayment is understood to create an obligation to repay immediately, and reference in the contract to repayment on request or on demand does not alter this’.

In what situations are loans not repayable on demand?

Nettle J at 51 citing Brooker v Pridham^[1] and the judgement of King CJ who stated that:

‘the shareholders’ deposit account creditors and the directors of the new company clearly expected that the balance of the accounts after ordinary deposits and withdrawals would be available indefinitely for use as working capital. Detail is not available, but the ordinary withdrawals must have been preceded by some form of notice, at least as much notice as involved in a withdrawal from a current account at a bank, see Joachimson v Swiss Bank Corp, supra. All must have assumed that such a creditor could not withdraw the entire balance of his account without some notice. The relationship of the parties, the course of conduct of the parties in relation to the operation of the accounts and the common assumption that the funds would be in use as working capital, combine to compel the implication of an agreement that liability to repay would not arise until at least some notice was given. It seem to me therefore that there was no immediate liability to repay and no right of action’.

When does the cause of action arise?

In Legudi because of a lack of evidence to the contrary, it was said by Nettle J at 41 that the cause of action arose at the time the loans were made.  Therefore the time limit to determine whether the matter was statute barred began at the time the loan was advanced.

Section 10 of the Limitation of Actions Act 1974 (Qld) (LAA) provides that a creditor has six (6) years to commence an action in relation to an unpaid debt.

Section 35 and 36 of the LAA provide that an extension on the period of limitation can occur where the debtor acknowledges the debt or make a payment in respect thereof, the right shall be deemed to have accrued on and not before the date of the acknowledgement or the last payment.  Any acknowledgment should be in writing and signed by the person making the acknowledgement.

Will the court imply a term into the loan contract?

The general rule restated in Legudi at 45 that: ‘a term may not be implied in a contract, except as a matter of law or custom, unless it is necessary to give business efficacy to the contract’.^[2]

It was said by Olsson J in Brooker v Pridham that:

‘If a loan is not to be treated as being of that species which is continuously recoverable at all times, then there must be a basis for asserting that the arrangements between the parties were contrary to such a legal situation eg because of the imposition of qualifications as to specific notice of mode of withdrawal or the requirement for some additional act or event before and action could be brought. Alternatively, some other feature of the arrangements between the parties may clearly negative the operation of the normal rule…’

In other words the construction of the contract should be determined by reference to the conduct of the parties as a whole.

Indicia that there should be a departure from the general rule

In Legudi the loans were recorded in the accounts of the respective company as being “current” as opposed to “long term”.  Therefore by analogy if a loan is recorded in the accounts as “Non-Current” this will be an indicia that the loan is not due and payable at will or by the provision of notice.

Other factors may be that no interest is recorded on loans and that the loans form a series of advances over time, with notice being provided in the form of requests for the loan.

Takeaways

If a loan is made without documenting the repayment terms then the creditor should diarise a period less than six (6) years after the advance to sue for the debt or alternatively seek a signed acknowledgement of the debt (including the amount owed) from the debtor.  Failure to do so could prevent the credit seeking repayment due it is being barred by the LAA.

Links and further references

Legislation

Limitations of Action Act 1974 (Qld)

Cases

Brooker v Pridham (1986) 41 SASR 380

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24

In the matter of Hayvio Pty Ltd – Ottavio v Hayvio Pty Ltd [2011] NSWSC 1125 (20 September 2011)

Ogilvie v Adams [1981] VicRp 92

VL Finance Pty Ltd v Legudi [2003] VSC 57

Further information about loans from directors

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Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Brooker v Pridham (1986) 41 SASR 380.

[2] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24.

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