How to avoid disputes when lending to or investing in a limited company

If you are a director of a private company limited by shares, there are a number of safeguards to put in place when introducing cash capital to the company as a loan to ease the company’s cash flow or to fund the expansion of the company’s business.

These safeguards are designed to protect your interest, increase your chances of being repaid and ensure that your money is more easily recoverable if the company defaults and is unable to repay the loan or its debts generally as they fall due.

It is important to carefully consider the following checklist of safeguards before lending money to a limited company.

Restrictions in the articles of association

The first step is to check the company’s articles of association to ensure there are no restrictions on the company’s ability to borrow money, or that the articles do not require the shareholders’ prior approval to borrow money above a certain level.

Do the director(s) have authority to borrow money on behalf of the company?

Conduct a check at Companies House to ensure the other directors of the company have the power to borrow money on behalf of the company and have been properly appointed.

Security on the loan to the company

Taking security for a loan as a lender is all about increasing the likelihood of getting repaid by the company. It may also avoid the need for litigation, ensure priority over other creditors of the company and hasten recovery of the debt.

The different types of security which a company may give for a loan includes mortgages, fixed charges and floating charges, book debts, guarantees, pledges and liens. The most appropriate type of security will depend on the facts of each situation and the available assets over which the security can be taken.

The security for the loan must then be registered. Provided the charge documents are correctly delivered on time, the charge will be fully valid against another creditor of the company, or an administrator or liquidator of the company if the company gets into financial difficulties.

However, failure to register the charge at Companies House renders the charge void against the company’s other creditors, and against a liquidator or administrator of the company, if the company is in financial difficulties. This means that the director will not have priority over the company’s other creditors and the loan will not be so easily recoverable.

These steps can help avoid future disputes and enhance prospects of recovery of invested funds into a limited company.