Shareholder And Director Loans In NZ: What Company Directors Must Know Legally

If you run a small company in New Zealand, there’s a good chance you’ll deal with money moving between you (or other owners) and the business at some point. Maybe you cover a bill personally and plan to “sort it out later”, or you take money out because cash flow is tight and you’re the one keeping the lights on.

This is where shareholder and director loans come in. They can be a practical way to fund the business (or repay yourself) without immediately changing shareholdings or going to the bank.

But if you don’t document these loans properly, you can create real headaches later - especially when you bring in investors, sell the business, have a co-founder fall out, or the company hits financial trouble.

Below, we break down what shareholder and director loans are, the legal risks to watch for, and the practical steps NZ company directors should take to stay protected from day one.

What Are Shareholder And Director Loans (And Why Do They Matter)?

A shareholder loan is money advanced between a shareholder and the company. A director loan is money advanced between a director and the company.

In many small businesses, the same person is both a shareholder and a director, so people often use the term interchangeably. Legally and accounting-wise, it still matters what capacity you’re acting in (and what the records show).

Common Examples

• You lend money to the company (e.g. to cover stock, wages, rent, or a tax bill).
• The company lends money to you (e.g. you draw funds out during a cash flow crunch, intending to pay it back).
• You pay company expenses personally (e.g. you use your own card for business software, equipment, or travel).
• The company pays personal expenses (this happens more than people think, especially in founder-run businesses).

These transactions matter because they affect:

• director duties (you must act in the best interests of the company and manage conflicts),
• solvency and creditor risk (especially if the company can’t pay its debts),
• tax treatment (how payments are treated can change the tax outcome), and
• future disputes (what happens if a shareholder exits and says the loan is owed?).

In plain terms: if you treat loans casually, they can come back to bite you at exactly the time you can least afford it.

Is A Shareholder Or Director Loan Legal In New Zealand?

Generally, yes - shareholder and director loans are legal in NZ. Companies can borrow money from owners and (in some cases) lend money to owners.

The catch is that you need to do it properly. Two areas usually trip directors up:

• director duties and conflicts of interest (because you’re effectively dealing with yourself), and
• solvency and approvals (because not every company can legally make every kind of payment at every time).

Director Duties Still Apply (Even If It’s “Your” Company)

Even in a one-director company, you’re still bound by the Companies Act 1993 duties - like acting in good faith and in what you believe to be the best interests of the company, and avoiding reckless trading.

If the company is under financial pressure, taking money out as a “loan” can raise questions later (including from a liquidator) about whether you complied with your duties and whether the company was solvent at the time.

Conflicts, Disclosure And Approvals (Interested Director Transactions)

When a director is lending to (or borrowing from) their own company, it’s usually an “interested director” situation under the Companies Act 1993. Practically, that means you should treat the decision like a real company decision - not an informal transfer.

In particular, you’ll generally want to:

• disclose the interest (including the nature and extent of it) to the board, and ensure it’s recorded in the company’s interest register/minutes,
• have the non-interested directors consider and approve the arrangement where possible (and document that approval), and
• check your constitution and any shareholders agreement for extra approval requirements (for example, requiring shareholder consent for certain related-party transactions).

Even if you’re the only director, you should still document the disclosure and the basis for the decision (including why it’s in the company’s best interests and how solvency was considered). This paper trail can be critical later.

Why Documentation Is So Important

A properly documented loan helps show:

• the money transfer was intended as a loan (not wages, dividends, or a gift),
• the terms (interest rate, repayment schedule, what happens if someone exits), and
• that the company followed a proper decision-making process.

This becomes especially important when you have multiple shareholders. If you don’t already have one, a Shareholders Agreement can help set rules around funding, loans, and what happens when someone wants out.

Key Legal Risks With Shareholder And Director Loans

Loans between owners and the company can be totally legitimate - but the risk profile is different from dealing with an independent third party.

Here are the most common legal risks we see for small businesses using shareholder and director loans.

1. “It Wasn’t A Loan” Disputes

If there’s no written agreement (or the accounting records are messy), you can end up in a dispute about what the payment actually was. For example:

• Was it a loan, or was it a capital contribution?
• Was it repayment of a prior loan, or was it a dividend?
• Was it reimbursement of expenses, or was it wages?

These disputes often surface when:

• a shareholder leaves the business,
• the company is sold, or
• the company runs out of money.

2. Unfairness Between Shareholders

Imagine you and a co-founder each own 50% of the company, but you keep lending money to cover costs. If the business later succeeds, you’ll probably want your loan repaid before profits are split.

If your arrangement isn’t documented, your co-founder might argue:

• you were voluntarily funding the company (not lending), or
• the “loan” should convert into shares, or
• repayment should be delayed or reduced.

This is also where company governance documents matter. A Company Constitution can include rules about decision-making and distributions, which can interact with how loans are managed.

3. Solvency And Insolvency Risk

If the company is (or is close to being) insolvent, payments out to a director/shareholder can be heavily scrutinised later. In an insolvency scenario, a liquidator may investigate transactions that look like:

• preferential treatment (paying insiders over other creditors),
• transactions at undervalue, or
• breaches of directors’ duties (including reckless trading or incurring obligations without reasonable grounds the company can perform them).

That doesn’t mean you can never repay a director loan - it just means you should be careful about timing, solvency, and how decisions are documented.

4. Tax And Compliance Mix-Ups

From a legal perspective, you should also be conscious that the “label” you use (loan vs dividend vs salary) won’t always control the tax outcome if the facts don’t match.

For example, if you’re regularly taking money out and never repaying it, it may be treated differently than a genuine loan. It’s a good idea to align your legal documentation with your accounting treatment and get tailored advice for your situation.

Note: This article is general legal information and isn’t tax advice. Because the tax treatment of shareholder/director advances can be fact-specific, it’s important to speak with your accountant or tax adviser about your particular circumstances.

What Should A Shareholder Or Director Loan Agreement Include?

If you want to use shareholder and director loans safely, a written agreement (or at least clear, consistent documentation) is your best friend.

In many cases, the cleanest approach is to put a proper Loan Agreement in place, even if it’s between you and your own company.

Key Terms To Cover

• Parties: who is lending and who is borrowing (individual, company, trust, etc.).
• Principal amount: how much is being loaned (and whether it’s a one-off or ongoing facility).
• Purpose (optional but helpful): what the funds are for (e.g. working capital).
• Interest: whether interest is charged, and if so at what rate and how it’s calculated.
• Repayment terms: on demand, fixed dates, minimum monthly repayments, or repayment when cash flow allows (be careful with vague wording).
• Default: what happens if repayments aren’t made.
• Priority/subordination: whether the loan ranks behind other creditors (this can matter if you later get bank finance or investors).
• Set-off: whether amounts can be offset against wages, expenses, dividends, or other entitlements.
• Security (if any): whether the company gives security over assets (this is a bigger step and should be carefully considered).

Don’t Forget Company Approvals And Records

Even if the written loan terms look fine, you should also make sure the company properly approves the transaction (especially if you have multiple directors or shareholders).

This might involve documenting the decision in writing (for example, director resolutions), and making sure the company’s records match what you’re doing in practice.

If you’re dealing with multiple owners, it can also be worth aligning your loan arrangements with your broader ownership and governance documents, like a Founders Agreement (early stage) and your shareholders arrangements (as you grow).

Practical Scenarios: How To Handle Common Small Business Loan Situations

Because small business life is messy, here are a few real-world situations where shareholder and director loans come up - and how to approach them sensibly.

Scenario 1: You’re Putting Money In To Keep The Business Going

If you’re injecting funds to cover operating costs, decide early whether that money is:

• a loan (repayable),
• a capital contribution (usually not repayable in the same way), or
• an amount you’re paying on behalf of the company as an expense reimbursement.

Then document it accordingly. If it’s intended as a loan, set repayment expectations upfront. If there are multiple shareholders, be careful about fairness and transparency.

Scenario 2: You’re Taking Money Out As A “Temporary Loan”

This can be a genuine director loan, but it’s also where people accidentally create risk. You should ask:

• Is the company solvent right now (and will it remain solvent after the payment)?
• Is there a clear plan to repay the amount, and is repayment realistic?
• Are you documenting it properly (so it doesn’t look like an unauthorised dividend or distribution)?

If you have employees, also be mindful not to blur the lines between “owner drawings” and employment entitlements. It’s usually a good idea to keep your employment arrangements clear and documented, like with an Employment Contract if you’re also employed by the company.

Scenario 3: The Company Pays A Personal Expense

If the company pays a personal expense, it’s not automatically illegal - but it should be treated carefully. You’ll want to ensure it’s either:

• properly reimbursed,
• treated as part of remuneration (with the right approvals and tax treatment), or
• treated as a loan with clear repayment terms.

The worst option is letting these payments accumulate without clarity, because that’s when disputes (and compliance issues) arise.

Scenario 4: You’re Selling The Business Or Bringing In Investors

Unclear shareholder and director loans are a common due diligence problem. A buyer or investor will usually want to know:

• what loans exist,
• who is owed money (and how much),
• whether loans will be repaid before completion, and
• whether any loans are secured or have special rights.

If this isn’t documented, it can slow down the deal, reduce the purchase price, or create a last-minute dispute between founders.

This is exactly why it’s worth tightening up your records and contracts early - it makes it much easier to sell your business or raise capital later.

Key Takeaways

• Shareholder and director loans are common in NZ small businesses, but they need to be treated as real legal and financial transactions (not informal “IOUs”).
• Loans between you and your company are generally legal, but director duties, conflicts of interest, and proper disclosure/approvals still apply - even if you’re the only director.
• The biggest risks are disputes about what the payment was, unfairness between shareholders, solvency/insolvency issues, and messy tax/compliance outcomes.
• A written Loan Agreement should clearly set out the amount, interest (if any), repayment terms, default consequences, and whether any security or priority applies.
• Company documents and governance matter too - your Shareholders Agreement and Company Constitution should align with how owner funding and repayments are handled.
• If you’re planning to raise investment or sell the business, clean and well-documented loans can make the process faster and reduce the risk of deal-breaking disputes.

If you’d like help documenting shareholder and director loans properly (or aligning them with your company’s structure and decision-making), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.