# Capitalisation of Directors loan



## Spudney (22 Jun 2009)

Hi

Can someone please give me the ins and outs of capitalising a directors loan, say if i invested €40,000 and was being paid back by the company but now the company isnt in a position to pay back this loan where do i stand as a minority shareholder and director? should i capitalise my loan/investment is this the best option or is there any cons to doing this? or is there a better way to go forward?

Cheers


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## Doingabit (22 Jun 2009)

Spudney,

Firstly, to be clear, you loaned the company €40k at a certain interest rate or maybe for no interest rate.
Is there a signed agreement for this loan? What are the conditions of this?

Secondly, the company has no funds to repay you the €40k. Is this short term or long term? 
If it is short term and you do not need the money ,which I think is the case, can you not wait and let the interest (if any) accrue.

By capitalising you mean subscribing for ordinary shares in the company?
Have you checked how many shares the company is authorised to sell and how many are in issue? What would your fellow shareholders think about this and what price/how many shares would you get for the €40k?

There are alot of issues here to deal with and without the relevant details its hard to advise.


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## Spudney (22 Jun 2009)

Spudney,

Firstly, to be clear, you loaned the company €40k at a certain interest rate or maybe for no interest rate.
Is there a signed agreement for this loan? What are the conditions of this?

*just a shareholders agreement i got shares for loaning the money*

Secondly, the company has no funds to repay you the €40k. Is this short term or long term? 

*I would say long term*

If it is short term and you do not need the money ,which I think is the case, can you not wait and let the interest (if any) accrue.

By capitalising you mean subscribing for ordinary shares in the company?
Have you checked how many shares the company is authorised to sell and how many are in issue? What would your fellow shareholders think about this and what price/how many shares would you get for the €40k?

*by capitalising i mean getting tax back for my investment*

There are alot of issues here to deal with and without the relevant details its hard to advise.


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## patftrears (22 Jun 2009)

Spudney said:


> *just a shareholders agreement i got shares for loaning the money*
> Did you pay for the shares, even if it's just a nominal amount, you have to buy shares.
> 
> *I would say long term*
> ...


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## Brendan Burgess (22 Jun 2009)

I don't think that you will get tax back by converting a loan into share capital.

The only way you might do this would be if you subsequently wrote off the value of the shares and wrote the loss against some other gains for CGT purposes. 

You get tax relief on the interest paid on money used to buy shares in certain circumstance. I don't know if you get tax relief on the money used to lend to a company. However, if they were paying you interest on the loan, you could write the interest paid against the interest received. 

From a tax point of view, it is usually better to have company loans rather than share capital.  There is no tax charge on repaying the loan, whereas it is difficult to get share capital out of a company.

There might be commercial reasons for converting a loan into share capital. For example, if you own 20% of the company, you will get only 20% of the profits.  By converting the loan into shares, you would own more of the company and so gain more of the upside when it recovers.


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## Spudney (23 Jun 2009)

hi

yeah i think its this seed capital scheme

http://www.enterprise-ireland.com/Grow/Finance/Seed_Capital_Scheme.htm


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## Spudney (23 Jun 2009)

where do i come in the pecking order legally if i have a directors loan given to the company by myself? is it creditors, employees first then directors loans?

is the company obliged to pay me back and what rights do i have or is it just tough it was the risk i took?


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## jack2009 (23 Jun 2009)

The directors loan will rank as an unsecured creditor, you will be second last before the shareholders of the company.

The order of what you have described is employees then unsecured creditors (creditors and directors treated equally)


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## jack2009 (23 Jun 2009)

The company is obliged to pay you back, however, you cannot pay yourself before paying all of the other creditors.  You are not allow to prefer any creditor.


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## Spudney (23 Jun 2009)

so i have to be paid back, thanks jack2009


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