Loan agreement between a company and its shareholder
Illustrative example: Imagine a situation that perhaps every entrepreneur has found themselves in by now. They needed to borrow money from the “company” account for their private purposes. We generally encounter this situation in the case of so-called single-member companies (s.r.o.), where the sole shareholder is also the managing director of the company.
In such a case, the company, as the creditor, provides a loan to the debtor – a natural person – its shareholder. This model of borrowing money from one’s own company thus places the shareholder in the position of debtor vis-à-vis their company. The legal basis for lending money in this manner is a loan agreement.
Naturally, our illustrative example would also work if the company were the debtor and the shareholder the creditor. We also frequently encounter this model in practice, as some companies prefer to finance their activities through loans from their owners (the company’s shareholders), especially in the first years of the company’s existence.
The loan agreement is governed by the Civil Code (Act No. 40/1964 Coll.). Under a loan agreement, the creditor transfers to the debtor items determined by type, in particular money, and the debtor undertakes to return items of the same type after the agreed period has elapsed.
In the case of a monetary loan, this therefore means returning the money. Where the loan is monetary, interest may be agreed. Although the Civil Code assumes that you may provide a loan and conclude a loan agreement without interest, such an arrangement is not recommended in the corporate world. Please bear in mind that the interest should be at market rates.
In the case of a non-monetary loan, instead of interest, the parties may agree on the provision of a reasonably larger quantity or items of better quality, generally of the same type.
A loan agreement is generally bilateral; signatures do not need to be notarized, nor is the form of a notarial deed required. It is concluded between the creditor, who lends the money, and the debtor, who borrows the money and undertakes to return it within a certain period, ergo to repay it.
It is important to remember, that the loan must also be returned to the creditor – in our case, the company. The form of return – repayment – may take various forms in the business world. The loan (together with interest) may be returned in the 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 may be considered as a reason for its extinguishment.
How does capitalization work? Under the conditions set out in the Commercial Code, the company adopts a resolution to increase its share capital, or to create and supplement the company’s capital fund, thereby giving the shareholder the right to assume an obligation to make a new contribution to the share capital or, as applicable, to the company’s capital fund. The company will thus have a receivable against the shareholder for payment of the assumed contribution obligation, while the shareholder has a due receivable against the company for repayment of the loan. The subsequent steps consist mainly of assessing the method of capitalization (cash vs. non-cash contribution) and drafting the relevant documents (e.g. a set-off agreement or documents relating to the capitalization of the receivable as a non-cash contribution).
Did you know that:
- Although a loan agreement is typically governed by the Commercial Code, it may be concluded under the Civil Code
- If the company is the creditor and thus provides a loan, that company may provide a loan, but also credit, transfer or grant the use of the company’s assets, or secure an obligation for a member of the board of directors, a procurist or another person authorized to act on behalf of the company, and persons close to them or persons acting on their behalf, only with the prior consent of the supervisory board and under conditions customary in ordinary business dealings. An exception exists for a publicly traded joint-stock company.
- If the persons referred to above are also authorized to act on behalf of other persons (e.g. another s.r.o. or joint-stock company), the conditions of prior consent and ordinary business dealings also apply to transactions (credit, loan, etc.) for the benefit of that other person. However, the consent of the supervisory board is not required where the transaction involves a controlling person acting for the benefit of a controlled person
- In the case of an s.r.o. that has established a supervisory board, the procedure applies accordingly
- in practice, one may encounter companies whose founding documents (articles of association, deed of incorporation or memorandum of association) stipulate that the provision of a loan by the company must first be discussed and approved by the general meeting. A minimum amount for such a loan is also usually specified. Therefore, it is always necessary to check the company’s founding documents, in their current version, to determine whether such an obligation does or does not apply to the company.
Do you need to prepare a draft loan agreement, capitalize a loan, or make a non-cash contribution to your company? Please do not hesitate to contact us: skypalova@skylex.sk
