Deed of postponement for a director loan: what your lender is really asking you to sign

You’ve lined up a business loan. Then the lender’s conditions arrive, and one line reads: “Deed of postponement of director and shareholder loans”. If you’ve ever put your own money into your company, that line is aimed at you. It isn’t a trick and it isn’t unusual, but it does change how you can take money back out, so it’s worth understanding before you sign.

What does a deed of postponement on a director loan actually do?

When you put cash into your company, your accountant books it as a loan from you to the company. It sits in the accounts as a “director loan”, “shareholder loan” or “loan account” and is a genuine debt the company owes you.

A deed of postponement is a signed agreement under which you promise the lender three things:

1. Your loan ranks behind theirs. If things go wrong, the lender is paid first.
2. You won’t demand or accept repayment of that loan while the lender is owed money, apart from anything the deed expressly permits.
3. You won’t take security for it (for example, a registered charge over the company’s assets) that could jump ahead of the lender.

That is the whole idea. You aren’t giving the money away, and the balance remains owed to you. You’re agreeing to wait at the back of the queue. ASIC uses the same concept in its deed of subordination guidance for financial services licensees, where a debt is moved behind others so the business still meets its financial requirements. Your lender’s version is a commercial document rather than an ASIC form, but the logic is identical.

Why do lenders ask for it?

Because to a lender, money you put in and money they put in are competing claims on the same cash. A few reasons come up again and again:

• It protects the balance sheet they assessed. If the lender counted your loan as a cushion, or simply priced the deal on the business keeping that cash, they don’t want it walking out the door the week after settlement.
• It stops you repaying yourself first. A company that repays the owner while the lender is still owed has moved value from a creditor to an insider.
• It tidies up the order of payment if the business later fails. Your claim would normally be an unsecured claim like any other creditor’s. The deed makes sure you can’t leapfrog the lender.
• It’s cheap for them to ask. It costs the lender nothing and often costs a healthy business little.

If the lender doesn’t ask, that isn’t necessarily good news. It may just mean they haven’t spotted the loan account yet, usually because the financials aren’t current or your bank statements show no owner deposits. See what lenders see in your bank statements for why those deposits get noticed.

What does it stop you doing, day to day?

This is where the reading matters. A good deed is narrow. A lazy one is a blanket ban.

Typical clause	What it means for you
No repayment of the loan while the facility is outstanding	You can’t pull your loan account back out, even if the business has a great month
No interest paid on the loan	Any interest the company owes you can accrue on paper but not be paid in cash
No security over the company’s assets	You can’t register a charge to protect your own loan
Turn over anything you receive	If you are repaid by mistake, you hold it for the lender
Applies “until the lender is paid in full”	The restriction runs for the life of the facility, not a fixed date

Look closely at what is not blocked. Ordinary wages, a properly declared dividend and reimbursement of business expenses you paid personally are not repayments of the loan account. Lenders often allow them while the loan is performing. If the deed is silent, ask for it to say so.

Is it safe to sign, or should I push back?

Signing is the normal outcome. Pushing back on everything can cost you the deal, but a few edits are routinely reasonable:

• Fix the amount. The deed should name the balance of your loan account at a date, plus future advances you make, so you know exactly what’s postponed.
• Allow repayments while the loan is in good order. For example, repayments you can take if there is no default, the repayments are up to date and the business still meets any ratio the lender set. Some lenders agree; some don’t. Asking costs nothing.
• Tie the end date to the facility. The postponement should fall away when the lender is repaid in full or when you refinance, with a release of the deed.
• Keep your personal exposure separate. A deed postponing your loan is not the same as a personal guarantee. Check you aren’t signing both in one document without noticing.
• Get the deed early. Ask for the draft with the loan offer. Deeds that appear on settlement day are signed in a hurry.

Because you sign in two capacities, as director for the company and as the person lending to it, it’s worth having a lawyer read it. Have your accountant confirm the loan account figure first: lenders’ document lists often ask for the same reconciled balance sheet.

Why does repaying yourself get risky when finances are tight?

Even without a lender’s deed, taking your loan back out of a business can cause problems. ASIC’s guidance for directors says that when a company is insolvent or at real risk of it, a director’s duties widen to cover creditors, and a company is insolvent if it can’t pay its debts when they fall due. Directors must watch that position all the time. ASIC’s RG 217 sets out the duty to prevent insolvent trading in detail.

There is a second risk. In a liquidation, payments the company made to creditors shortly before it failed can be challenged and clawed back, and payments to a related party such as a director are examined over a longer period than payments to outsiders. Repaying your own loan account right before trouble is the classic example. The deed is, in a sense, a lender protecting itself from the same behaviour. It’s also a reminder to keep your loan account clean and documented.

A related ATO point runs in the opposite direction. If the company lends money to you, Division 7A can treat it as a taxable dividend unless a compliant written loan agreement is in place, as the ATO’s Division 7A loan guidance explains. That is a tax question for your accountant, but it’s worth knowing which direction your loan runs before you read the deed.

How does it play out? A worked example

Say a café group’s company has a loan account showing $120k that the owner put in over the years. The owner applies for a business loan to open a second site. The lender’s offer lists a deed of postponement.

The owner reads it and finds a blanket ban on any payment to them. They ask for three changes: the postponed amount fixed at $120k plus future advances, wages and dividends expressly allowed while the loan is performing, and the deed to end when the facility is repaid or refinanced. The lender accepts the first and third and agrees the second with a no-default condition. The owner signs, and the loan settles on time.

Notice what happened: nothing about the owner’s money changed. The loan account is still owed to them. They simply agreed to leave it there while the lender is outstanding, in exchange for the finance.

What if you don’t want to sign?

You have options, though each has a trade-off:

• Repay the loan account first if the business has genuinely spare cash. The deed then has little to catch, but you’ve thinned the company just as it’s being assessed.
• Capitalise the loan by converting it to equity (shares). Then it isn’t a debt owed to you at all. Take advice, because it is permanent and has tax and control consequences.
• Offer different support, such as more security or a smaller loan, if the lender will trade.
• Look at another lender. Policies differ. Our guide to what to do when the bank declines covers how to line up a second option without a pile of applications.

If your cash flow is the problem rather than the paperwork, small business loans and refinancing a business loan are the shelves to start on. If you’re unsure which one fits, see if you qualify and we’ll point you at the right one.

Ready to find out where you stand?

A deed of postponement is one of those documents that looks scarier than it is, as long as someone has read it with you. If a lender has put one in front of you, or you’d like to know what a lender will ask for before you apply, we can walk through your situation and the likely conditions.

Enquiring takes about 60 seconds, and your credit file isn’t touched just for asking. We don’t send your details to a pile of lenders, so your phone won’t light up with strangers; a real person reads your enquiry, looks at your situation and calls you. Please fill the form in accurately, including any loans you’ve made to the company, so we can point you at the right option first time.

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