The Need for Related Party Loan Agreements

With the advent of the PPSR regime, it is now more important than ever to ensure that related party loans are properly documented.

Many people rely on simple entries in a balance sheet to evidence a related party loan. But what they don’t realise is that such an entry does not preserve priority in the event that the debtor goes into liquidation or there is another creditor claim.

In order to protect the creditor, a general security agreement should be put into place and registered on the PPSR. If you take these two steps, the creditor’s interest will be a ‘secured interest’ and rank ahead of other unsecured creditors, thereby giving the creditor the best chance of recovering their money.

For example, take a common scenario where a Mum and Dad loan money to their family trust for the purchase of plant and equipment. When loaning the money, Mum and Dad may have intended that they have first bite of the cherry from the assets of the trust to repay the loan. But, unless the loan is properly documented and registered on PPSR, Mum and Dad might end up ranking equally with other creditors of the trust, or even below other secured creditors of the trust.

Castle can assist you with properly documenting and registering related party loan arrangements. Speak to Castle today about getting your clients’ loans in order for their protection. Give us a call on 03 9899 9300 or send us an email. We’ll be happy to help.