Drawings or shareholder loans?

In this case1, the court had to decide whether payments made to directors and shareholders of a company in liquidation were drawings or shareholder loans.

The defendants were both directors and shareholders of the plaintiff company in liquidation. Within the three years prior to the company's insolvency, the company advanced substantial sums to the defendants. The advances were described as "drawings" in the cash book.

The liquidator argued that the advances were in fact shareholder loans that should be repaid to the company. The defendants argued that the advances were payments made as rewards for their services and that the description in the cash book was for convenience only and needed to be finalised.

The court determined that, because the defendants did not pay tax on the payments they received, and because there was no other evidence supporting the reward for services argument, the payments were repayable shareholder loans.

 

1Covich Contractors Ltd (in liq.) v Covich High Court Auckland, CIV-2005-404-006821, 27 July 2006

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