Shareholder Loan Agreement

When do I use this document?

• for a loan to a company by an individual or corporate shareholder
• for a loan to be made in a single advance
• for a borrower which is a private limited company incorporated in England and Wales

What are the key features?

• short form loan agreement with less onerous provisions than a commercial loan
• 20 clauses over 10 pages
• alternative clauses depending on whether the loan is interest-free or carries interest
• flexible repayment date for the loan
• undertakings from the borrower, including to provide accounting information and restrictions on dividends, granting of security and other borrowings
• events of default

What else do I need to know?

Generally, a company can be funded by its shareholders in one of two ways:

• equity: by the shareholders investing money in return for shares in the company
• debt: by the shareholders lending money to the company

If a shareholder receives equity in the company, the amount invested becomes part of the capital of the company and is not usually repayable in normal circumstances.  On a winding-up of the company, the shareholder capital is only repaid once all other creditors of the company have received payment of the amounts owed to them by the company.

If a shareholder lends money to the company, the loan will be repayable by the company in accordance with the terms agreed between the shareholder and the company.  These terms may include the payment of interest on the amount borrowed.  On a winding-up of the company, the loan will rank equally for payment with the company’s other ordinary creditors and in priority to the company’s shareholders.

What terms are different for a shareholder loan?

A shareholder who makes a loan to a company has a joint interest in the company, as both a lender and shareholder.

The loan terms are likely to be less onerous than a third party or bank loan.

In particular:

• interest: a shareholder loan may be interest-free or with a lower interest rate than a third party loan. Interest may only be payable if the company is able to pay the interest
• repayment: a shareholder loan may only be repayable when the company is able to make repayments
• events of default: a shareholder loan may have less onerous events of default than a third party loan