Loan Agreement Between a Company and Its Shareholder
Illustrative example: Imagine a situation that almost every entrepreneur has faced. They needed to borrow money from the "company" account for their private purposes. Typically, we encounter this situation with so-called single-member companies (s.r.o.) where the sole shareholder is also the executive of the company.
In such a case, the company, as creditor, provides a loan to the debtor – a natural person – its shareholder. This model of borrowing money from one's own company places the shareholder in the position of debtor towards their company. The legal basis for lending money in this way is the loan agreement.
Naturally, our illustrative example would also work if the company were the debtor and the shareholder the creditor. This model is also common in practice, as some companies prefer to finance their activities through loans from their owners (shareholders of the company), especially in the early years of the company's existence.
Loan Agreement is governed by the Civil Code (Act No. 40/1964 Coll.) By a loan agreement, the creditor hands over to the debtor things identified by type, especially money, and the debtor commits to return things of the same kind after the agreed period.
In the case of a monetary loan, this means returning money. If it is a monetary loan, interest may be agreed upon. Although the Civil Code assumes that you can provide a loan and conclude a loan agreement as interest-free, this is not recommended in the corporate world. Please keep in mind that interest rates should be market-based.
For a non-monetary loan, instead of interest, a provision of a reasonable larger quantity or better quality of things, generally of the same kind, may be agreed upon.
A loan agreement is usually bilateral; signatures do not need to be notarized, nor is a notarial deed required. It is concluded between the creditor, who lends the money, and the debtor, who borrows the money and commits to return it within a certain period, i.e., to repayment.
It is important to remember, that the loan must be repaid to the creditor – in our case, the company. The form of repayment – settlement – takes various forms in the business world. The loan (together with interest) may be repaid in a manner described in the agreement.
If the loan agreement is concluded between the company as debtor and the shareholder as creditor, the so-called capitalization of the receivable as a reason for its extinction may be considered.
How does capitalization occur? Under the conditions of the Commercial Code, the company adopts a decision on increasing the registered capital or creating and supplementing the capital fund, whereby the shareholder gains the right to take on the obligation of a new contribution to the registered capital or capital fund. The company then has a receivable against the shareholder for the payment of the assumed obligation to contribute, while the shareholder has a payable receivable against the company to repay the loan. Subsequent steps mainly involve assessing the method of capitalization (monetary vs. non-monetary contribution) and drafting the relevant documents (e.g., set-off agreement or documents related to the capitalization of the receivable as a non-monetary contribution).
Did you know:
- Although the loan agreement is typically governed by the Commercial Code, it can be concluded according to the Civil Code.
- If the company is the creditor and thus provides a loan, such company may also provide a loan, but also credit, transfer or provide the use of company assets or secure an obligation to a member of the board, procurator, or another person authorized to act on behalf of the company, and to their close persons or persons acting on their behalf, only based on the prior consent of the supervisory board and under conditions customary in ordinary business dealings. An exception exists for a public joint-stock company.
- If the persons mentioned above are authorized to act also on behalf of other persons (e.g., another s.r.o. or joint-stock company), the conditions of prior consent and usual business practice also apply to the performance (credit, loan, etc.) in favor of this other person. However, the consent of the supervisory board is not required if the performance concerns the controlling person in favor of the controlled person.
- In the case of an s.r.o. that has a supervisory board, the procedure is applied accordingly.
- In practice, there are companies that have provisions in their founding documents (statutes, founding charter, or articles of association) that the provision of a loan by the company must be discussed and approved in advance by the general meeting. Usually, a minimum amount for such a loan is also specified. Therefore, it is always necessary to check the founding documents in their valid version to see whether such a requirement applies to the company.
Do you need to draft a loan agreement proposal, capitalize a loan, or make a non-monetary contribution to your company? Please do not hesitate to contact us: skypalova@skylex.sk
