Can A Community Interest Company (CIC) Repay A Director’s Loan Account With Company Assets?

If you’re a director of a Community Interest Company (CIC) and you’ve loaned the company money, the question is: can a CIC repay a director’s loan account using company assets? is bound to feature at some point, particularly if it runs into financial difficulty. You cannot do so in full if a company is insolvent and unable to pay all its debts when they fall due. You may be able to do so, subject to the rules of the CIC’s articles of association, if the company is solvent.

What Is A Director’s Loan Account In A CIC?

A director’s loan account is when a director lends personal funds to the company, often to help the CIC when it is short of cash. In a CIC, which exists to benefit a community rather than shareholders, these loans are fairly common, particularly in the early stages or during tough times.

But when it comes to repayment, especially through company assets like cash, vehicles, or stock, the rules are stricter than with a regular limited company.

Can A CIC Repay A Director’s Loan While Solvent?

If the company is solvent (meaning it can pay its debts on time), then repaying a director’s loan may be acceptable provided the repayment:

• Is properly recorded in the company’s books.
• Reflects the fair market value of any non-cash assets.
• Doesn’t harm the community purpose of the CIC.
• Takes proper account of the rules of the asset lock in the articles of association

It’s also essential that repayments aren’t excessive or disguised as personal gain. The CIC Regulator keeps a close eye on how assets are used, especially when directors are involved.

What Happens If The CIC Is Insolvent?

If your CIC is insolvent or close to it, then your director’s duties mean you must act in the best interests of the company’s creditors, not yourself. This is known as the Creditor Duty. You may seek to wind up a community interest company (CIC) as a result of that duty.

Repaying yourself from company assets during this time could be risky. If it’s seen as giving you preferential treatment over other creditors, a future liquidator may reverse the payment in the event of the liquidation of a community interest company. This is known as a preference.

You also need to avoid transferring assets below market value. That could be a transaction at undervalue, which is another red flag in insolvency cases.

What About the CIC’s Asset Lock?

CICs are subject to something called an asset lock. This legal mechanism ensures the company’s assets are used to benefit the community. Directors and shareholders can’t simply take value out of the company without consideration of the asset lock position set out in the articles of association.

Taking repayment, especially in the form of company assets, must not conflict with the CIC’s community benefit purpose.