News & Insights

In the dynamic landscape of economic pressures, shareholders often find themselves needing to provide financial support to the companies they own and operate. While extending a loan can be a strategic move, it is imperative for shareholders to protect their interests by formalising the arrangement by way of a loan facility and security agreement.

Reasons shareholders provide loan funding to companies

• Cash flow support: Shareholders may provide loans to address short-term cash flow challenges, ensuring the company has the liquidity needed to meet its operational expenses and obligations.
• Facilitating expansion: Loans from shareholders can fund expansion initiatives, allowing the company to explore new markets, invest in technology, or acquire assets that contribute to long-term growth.
• Project funding: Shareholder loans may be directed towards financing specific projects crucial for the company’s development, enabling timely implementation without compromising financial stability.

By entering a loan facility agreement with security, shareholders can establish security for amounts advanced under the loan. Having security in place assists in protecting the shareholder’s interests in the event of default by the company. In the unfortunate event of insolvency, having a loan secured is even more crucial for shareholders. Without a well drafted security agreement, shareholders risk being treated as unsecured creditors, facing potential losses.

Purposes of a loan facility and security agreement

• Priority of Payments: Clearly outlining the priority of repayments in the event of liquidation and providing better protection to the shareholder’s position relative to other creditors.
• Acceleration Clauses: Provision for clauses that allow for the acceleration of the obligation to repay the loan in the event of insolvency, which may assist the shareholder in recovering funds from the company.
• Security Enforcement: Defining the process for enforcing security in the event of default or insolvency, which assists in providing the shareholder with a streamlined mechanism for recovering assets.

Security under loan agreements can include mortgages over real property held by the company, as well as security interests in the company’s other assets. Importantly, having facility and security agreements in place may allow the shareholder to register their interest on the Personal Property Securities Register.

We’re here to help

Navigating the complexities of insolvency law in a dynamic commercial environment requires expert guidance. Shareholders looking to extend loans to the companies they invest in should consider seeking advice from our dedicated commercial law team prior to making advances or further advances to the company.

With expertise in commercial and insolvency law, we possess the knowledge and skills to tailor loan facility and security agreements to your specific needs to help navigate challenging financial circumstances. Contact our team for more information.