Quick summary
A director loan account can affect Small Business Restructuring by changing how a company’s assets, liabilities, and financial position are assessed. While having a director loan does not automatically prevent an SBR, poorly documented or unrecoverable loans can raise concerns during the process.
On this page
- Introduction
- Director Loan Accounts in Small Businesses
- Can Director Loan Affect SBR Eligibility?
- How Director Loans Are Treated
- Money Owed by a Director
- Money Owed by the Company
- ATO and Creditors’ View
- Common Issues
- How to Prepare
- How Director Loans Are Treated
- Next Steps
- FAQs
Introduction
Director loan accounts are common in small businesses. But when cash flow becomes tight, these accounts can attract more attention than expected. Money moving between a company and its director can affect how the business’s financial position is assessed during restructuring.
This blog explains how director loan accounts can affect Small Business Restructuring, what issues to watch for, and how to prepare.
Director Loan Accounts in Small Businesses
A director loan account records money moving between a company and its director. This is common in Australian small businesses, where directors may put personal money into the company or withdraw funds.
The company and director are legally separate. Company money should not be treated as the director’s personal funds.
A director loan account can show:
- The director owes the company: For example, funds withdrawn for personal use.
- The company owes the director: For example, money the director personally contributed to pay business expenses.
This distinction matters when a company faces financial difficulty. Money owed by a director may be a company asset, while money owed to a director may be a company liability.
Under Australian law, these transactions should be properly recorded and supported by financial records. Before restructuring, the account should be reconciled, so the company’s financial position is clear.
Can Director Loan Affect SBR Eligibility?
Having a director loan does not automatically make an Australian company ineligible for small business restructuring.
Under the Corporations Act 2001 (Cth), an eligible company must meet specific requirements. For example, its total liabilities must not exceed $1 million when the restructuring practitioner is appointed. There are also restrictions relating to previous restructuring and simplified liquidations involving the company’s directors.
A director loan can still affect how the company’s financial position is assessed.
For example:
- Money owed by the director may be a company asset.
- Money owed to the director may be a company liability.
- Poor records may make the company’s true position difficult to establish.
- Certain transactions may raise tax, accounting, or recovery concerns.
So, the issue is not simply whether a director loan exists. It is whether the account accurately reflects the company’s financial position and whether the proposed restructuring is viable.
How Director Loans Are Treated
A director loan account may be reviewed when the restructuring practitioner assesses the company’s finances and prepares the restructuring plan.
- If the director owes the company money, the practitioner may consider whether the debt can realistically be recovered.
- If the company owes the director money, the situation is different. A director may be a related creditor and an excluded creditor under the small business restructuring regime.
This means a director should not assume their loan will receive the same treatment or voting rights as an unrelated creditor.
The exact treatment depends on the loan, the relationship between the parties, and the relevant provisions of the Corporations Act 2001 (Cth) and Corporations Regulations 2001 (Cth).
Money Owed by a Director
If a director owes money to the company, the balance will generally be considered when assessing the company’s assets.
However, an amount shown in the accounts does not automatically mean the company can recover it.
The restructuring practitioner may look at:
- How the debt arose.
- How much is actually owed.
- Whether the director can repay it.
- Whether repayment terms are documented.
- Whether the transactions are properly recorded.
- Whether there are disputes or tax issues.
This matters because an asset only helps the company if there is a realistic prospect of recovering it. ASIC also identifies unrecoverable loans to associated parties as a warning sign of financial difficulty.
Money Owed by the Company to the Director
A company may legitimately owe money to its director. For example, a director may use personal funds to pay suppliers, wages, rent, or other business expenses.
However, a director’s claim may not be treated like an ordinary trade creditor during small business restructuring.
Under the Corporations Act 2001 (Cth), related creditors can be excluded creditors under the restructuring regime. This can affect their ability to participate or vote in the same way as unrelated creditors.
The director loan should therefore be clearly documented and correctly reflected in the company’s accounts.
ATO and Creditors’ View
Director loans can attract additional attention from the Australian Taxation Office (ATO) and creditors when a company is experiencing financial difficulty.
For private companies, Division 7Aof the Income Tax Assessment Act 1936 (Cth) can apply to certain payments, loans, or benefits provided to shareholders or their associates. Where Division 7A applies, specific tax and repayment requirements may need to be met.
Being a director does not automatically mean every director loan is subject to Division 7A. The circumstances of the transaction matter.
Creditors and the restructuring practitioner may also want to establish whether:
- Company funds have been transferred to the director.
- The company has an asset it can realistically recover.
- The director genuinely provided funds to the company.
- Transactions are properly documented.
- The accounts accurately reflect the company’s financial position.
- Unexplained or poorly documented transactions can create unnecessary questions during restructuring.
Common Issues
A director loan does not automatically undermine a restructuring plan. Problems usually arise when the account makes the company’s financial position difficult to understand.
- Large, unexplained withdrawals: Significant amounts have been taken from the company without clear records showing why or how they were used.
- Personal expenses through the company: Company funds have been used for personal spending without being correctly recorded or treated for tax purposes.
- Poorly reconciled accounts: The director loan balance does not match the company’s bank transactions or supporting records.
- Unrecoverable loans: The accounts show money owed by the director, but there is little realistic chance of the company recovering it.
- Missing loan documentation: There is no clear written agreement or supporting evidence explaining the loan’s terms.
- Division 7A problems: A private company loan to a shareholder or associate has not been dealt with correctly under Division 7A.
- Last-minute adjustments: The director loan balance is changed shortly before restructuring without a clear commercial reason.
- Mixing personal and business finances: Personal and company transactions have been regularly mixed, making the company’s true financial position harder to establish.
ASIC identifies incomplete financial records, disorganised accounting procedures, and unrecoverable loans to associated parties among the warning signs of financial difficulty.
How to Prepare
If a company is considering small business restructuring, it is better to address director loan accounts early.
Start by reconciling the account against the underlying transactions. This can include:
- Reviewing company bank statements
- Identifying payments to and from the director
- Separating business expenses from personal spending
- Recording expenses the director paid personally
- Reviewing loan agreements
- Confirming the current balance
- Checking interest and repayments
- Reviewing the tax treatment of relevant transactions
- Identifying disputed or difficult-to-recover amounts
The company’s tax and financial records should also be up to date.
Under the Corporations Act 2001 (Cth), a company generally cannot propose an SBR plan unless it has paid its due employee entitlements. It must also have lodged, or substantially complied with lodging, its required tax documents.
Directors should also avoid making artificial adjustments to a loan account simply to make the company appear financially stronger.
Any significant repayment, waiver, correction, or restructuring of a director loan should be considered carefully with a financial adviser.
How Director Loans Are Treated
Small business restructuring is only one option for a company facing financial difficulty, and director loans are treated differently depending on which path is taken.
- Small business restructuring: A director loan is generally treated as a related-party debt. If it existed when restructuring began, it’s typically excluded from voting on the restructuring plan, though it can still be paid out under the plan’s terms alongside other admissible debts.
- Voluntary administration: Director loans are treated similarly to SBR in some respects — related-party guarantees and debts attract closer scrutiny, and the administrator must declare their own independence from related parties. Unlike SBR, though, an external administrator takes full control of the company, rather than the director continuing to manage day-to-day operations.
- Liquidation: This is where director loans carry the most risk. If a director loan was repaid before the company became insolvent, a liquidator can potentially claw that payment back as an unfair preference. For related parties, including directors, this look-back period is up to four years before the winding up, compared to just six months for an ordinary arm’s-length creditor. This makes any director loan repayment made in the years leading up to insolvency worth reviewing carefully before liquidation is considered.
- Informal arrangements: Negotiating directly with creditors doesn’t involve the same statutory framework for related or excluded creditors. A director loan is simply one more factor in the negotiation, rather than something subject to specific voting exclusions or clawback rules.
Each option treats director loans differently, so understanding these differences is worth doing before deciding which path to pursue — not after.
Next Steps
If your company is heading toward small business restructuring and director loans are part of the picture, sorting them out early can protect your position and strengthen the plan. You can:
- Reconcile the director loan account against bank statements and supporting records
- Confirm whether the director owes the company, or the company owes the director
- Check whether any Division 7A requirements apply and have been met
- Gather documentation for the loan’s terms, balance, and repayment history
- Speak with a registered restructuring practitioner before making any changes to the loan
At Halo Advisory, financial expert Greg Bartels offers a no-obligation consultation to assess your position and explain your options. Get in touch today.
FAQs
Can a director repay a loan before entering small business restructuring?
Yes, but the repayment should have a genuine commercial basis and be properly documented. Repaying a director loan shortly before restructuring may require closer scrutiny.
Can a director loan be written off before restructuring?
It may be possible, but writing off a loan can have tax and insolvency implications. Directors should obtain professional advice before making this decision.
Does a director loan affect the amount creditors receive?
Potentially. If the director owes the company money and it can be recovered, that amount may increase the assets available to support the restructuring plan.
Can a director loan be included as an asset in an SBR?
Yes, if the director owes the company money, the debt may be considered an asset when assessing the company’s financial position.
What if a director loan is disputed before restructuring?
The restructuring practitioner may need to investigate the transaction, supporting records, and amount claimed before determining how it should be treated.
Can a director loan push a company over the SBR liability limit?
A loan owed to the director may form part of the company’s liabilities and could affect the eligibility assessment if total liabilities exceed the applicable threshold.
Does a director loan need to be included in the restructuring plan?
The loan should be accurately reflected in the company’s financial records and considered when assessing its assets, liabilities, and overall financial position.
What happens if a director loan has no written agreement?
The absence of documentation can make it harder to establish the loan’s terms, balance, and legitimacy during the restructuring process.
Can a director loan affect the company’s solvency assessment?
Yes. A recoverable amount owed by a director may strengthen the company’s asset position, while an unlikely-to-be-recovered loan may provide little practical value.
What if the director has used company money for personal expenses?
Those transactions should be identified and correctly recorded, as they may create accounting, tax, and potential recovery issues.
Can a director loan be converted into shares before SBR?
It may be possible in some circumstances, but doing so shortly before restructuring can have legal, tax, and insolvency implications and should be professionally reviewed.
Does a director loan affect creditors’ returns under SBR?
It can. If money owed by a director is realistically recoverable, it may increase the assets available to support the restructuring proposal.
