Director’s Loan – Secured over Joint Property
This Director’s Loan Agreement – Secured over Joint Property records the terms of a secured loan given by a company to a director of a company or a person connected with a director.
The Loan is secured by an equitable charge over the director’s (or connected person’s) property. This Agreement should only be used where the director owns his or her property jointly with another person. If the property is owned in the director’s sole name please see the Director’s Loan Agreement – Secured (Secured Loan).
An equitable charge is a weaker form of security than a legal charge. This document provides for an equitable charge rather than a legal charge because the Land Registry formalities are simpler.
The equitable charge will rank behind any legal charges that the director has already entered into or subsequently enters into, such as a bank or building society mortgage. This means that, if it becomes necessary to enforce the security, the creditors with legal charges will be paid off first out of the proceeds of sale.
As the co-owner is not deriving any direct benefit from the Loan, but is taking the risk of offering his or her property as security, the legal presumption of “undue influence” applies, i.e. there is an assumption that the director has unduly influenced the co-owner to enter into the Loan Agreement. This presumption can be rebutted by demonstrating that the co-owner has taken independent legal advice on the nature and effect of the Loan Agreement. The Company must ask the co-owner to obtain independent legal advice and must receive from the independent adviser a letter certifying that advice has been given. If the presumption of undue influence is not rebutted, the Loan Agreement will be unenforceable against the co-owner (although it will remain enforceable against the director).
The Loan can be drawn down in one or more advances and the optional wording in square brackets in clause 5 should be amended accordingly.
Clauses 16 and 17 relate to the Land Registry applications the company should make to protect its equitable charge over the director’s (jointly owned) property. The first application is for a Unilateral Notice to be entered in the charges register of the registered title. This puts a potential buyer of the property on notice that the property is subject to the company’s equitable charge.
The second application is for a Restriction to be entered in the proprietorship register. This means that a transfer of the property to a buyer will not be registered without the company’s consent. The company will therefore be able to insist that either the loan is repaid or suitable alternative security is provided before it will consent to a transfer.
Further information about the Unilateral Notice and the Restriction, including guidance on completing the relevant Land Registry forms, can be found in the Guidance on Land Registry Applications relating to a Director’s Secured Loan (Land Registry Guidance).
So far as Company Law is concerned, the general rule under the Companies Act 2006 is that a company cannot make a loan to a director, or give a guarantee or provide security in connection with a loan made by any other person to such a director, unless the transaction has been approved by a majority of the company’s shareholders. The relevant resolution is the Shareholders’ Ordinary Resolution for Approving Loan to a Director or Acting as Guarantor for a Director (Approving Loan to Director).
If the aggregate value of the loan and other related loans to a director does not exceed £10,000, there is no requirement for shareholder approval. There are a few other exceptions to the requirement for shareholders’ approval; these are set out in sections 204-209 of the Companies Act 2006. However, in most cases where the loan is for personal use of the director, and exceeds £10,000, shareholder approval will be required. Further information can be found in our Company Secretary Factsheet ‘Loans to Directors’ (CO.CS.16) in the Company Secretary and Admin folder.
The company should ensure that in making loans it complies with the Consumer Credit Act 1974, either by complying with the requirements for regulated loans or by bringing the loan terms within one of the exemptions. Information about the CCA, including licensing and exemptions, is available on the Financial Conduct Authority website.
The Agreement should be signed as a deed. The company should execute the deed in one of the ways permitted under the Companies Act 2006.
This Director’s Loan Agreement – Secured over Joint Property is in open format. Either enter the requisite details in the highlighted fields or adjust the wording to suit your purposes. The document is duplicated in the Loan Agreements folder.
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