Can you have 0% interest rate with a term of 10 years and no minimum repayment in preparing a Loan Agreement between two companies as a line of credit?

These are some of the issues to think about when structuring a loan interest free.

If the company were to go into insolvency, there are several arguments that an administrator or liquidator might use to challenge the transaction, particularly given the unconventional terms of the loan such as a 0% interest rate, a 10-year term with no minimum repayments, and it being secured. These arguments could include:

1. Uncommercial Transaction: Under the Corporations Act 2001 (Cth), an administrator or liquidator may argue that the loan constitutes an uncommercial transaction. This would involve demonstrating that the transaction was not conducted on terms that a reasonable person in the company's circumstances would have agreed to, especially given the 0% interest rate, which is not typical in commercial lending.

2. Unfair Preference: If the loan is secured close to the time of insolvency, an administrator might argue that the transaction constitutes an unfair preference. This argument would be based on the premise that the loan agreement and the granting of security unfairly put the lender in a better position than other unsecured creditors in the event of insolvency.

3. Insolvent Trading: If the loan was provided at a time when the company was insolvent or became insolvent due to the transaction, and there were no reasonable grounds to expect solvency, the directors could be held liable for insolvent trading. The unusual terms of the loan might be used as evidence that the directors were not acting in the company's best interests.

4. Voidable Transactions: The loan might be challenged as a voidable transaction if entered into during the specified period before the company's insolvency. The administrator could argue that the transaction was designed to defeat, delay, or interfere with the rights of creditors.

5. Director's Duties: An administrator might scrutinize the directors' actions in approving the loan, particularly if the terms appear to be detrimental to the company's financial position or not in the best interests of the company as a whole.

To mitigate these risks, it's essential to ensure that the loan is entered into on commercial terms, with proper due diligence, clear documentation, and a solid rationale for the structure and terms of the transaction.

The template is a standard template but if you need to customise the loan you will need specific legal advice.

Please be advised this is general information only, and is not to be taken as legal advice. If you would like more information, or have a legal query, please contact Abbott & Mourly directly.
Reviewed: 20/02/2024