It is not uncommon for private companies to make loans to their directors, and for those loans to to be made without any formal agreement.
It is also not uncommon for those loans to remain unpaid for a period in excess of six years. A question then arises as to whether recovery of the loans is statute barred. This can have serious ramifications, first as to whether the director is responsible to repay the loan, as an example if the company is placed into liquidation, and second, whether it has triggered any adverse issues due to debt forgiveness.
Leaving aside arguments that a director might be responsible regardless for preferring their own interests to those of the company or failing to act reasonably as a director in not causing the company to recover the debt or at least obtain an acknowledgment, another question arises as to whether the limitation period has been extended because of any acknowledgments of indebtedness made by the director, triggering the extensions of the limitation period provided in section 35 of the Limitations of Actions Act (Qld). In this regard, it is also important to note that in Queensland, an acknowledgment of debt can re-enliven the limitation period even after the limitation period had expired (this is not the case in some other jurisdictions).
The Queensland District Court recently considered whether the annual accounts of the company – signed by the director and noting the loan – were a sufficient acknowledgment of the debt to trigger the restarting of the limitation period. On the facts, and having regard to the type of accounts, His Honour Porter KC DCJ considered that the accounts comprised an acknowledgment made by the director to the company in respect of the debts owed by the director to the company shown in the accounts. The director’s opposition to recovery on the basis that it was statute barred failed.
The decision (Commercial Images (Aust) Pty Ltd (in Liq) v Manicaros  QDC 77) provides a very useful discussion of law relating to acknowledgments of debts, and then applies that discussion to a number of factual scenarios. It is not uncommon for directors to take money out of companies by characterising the payments as loans to them rather than salary. Doing so however carries a number of risks, one obvious risk being that if the company is put into liquidation or control of it is lost, then the loan can be called up.
For advice in respect of company loans, contact Peter Muller at email@example.com