What Happens to My Division 7A Loan if My Business is Insolvent?

As Director Penalty Notices (DPNs) ramp up and insolvencies rise, you may be concerned about how your finances might be affected if your company becomes insolvent. One pressing question many business owners ask is whether Division 7A loans will need to be repaid if a business goes into liquidation.

In this article, we explore what Division 7A loans mean for you during insolvency, with insights from Adam Cormack, Director of RSM’s Restructuring and Insolvency division.

Understanding Division 7A Loans

A Division 7A loan allows you, as a director or shareholder, to access funds from your business without immediate tax consequences. You might use it in place of wages, as advances on profits, or even to cover personal expenses. However, strict conditions apply, including a repayment schedule with interest. While these loans offer flexibility, they don’t simply disappear if your business faces insolvency.

What Happens to a Division 7A Loan During Liquidation?

If your business goes into liquidation, any Division 7A loan is treated as an asset on the company’s balance sheet. The appointed liquidator will assess the loan and may look to recover repayment from you. As part of this process, the liquidator will review your financial position to see if the loan can be repaid fully or partially.

If the loan amount is substantial, the liquidator might need court or creditor approval to compromise on the repayment.

Can Division 7A Loans Be Forgiven?

Most Division 7A loans won’t be completely forgiven. While there are rare situations where it may be deemed uncommercial to pursue repayment, it’s important to remember that a loan will likely remain a consideration. Liquidators will focus on the best outcome for the company and its creditors, which often includes working with you to find a realistic repayment solution.

What If You’re Personally Struggling to Repay?

If you have multiple personal obligations—such as a DPN or outstanding debts to the ATO—your total liability might be more than you can handle. In extreme cases, this can lead you to consider personal insolvency options. However, by managing your financial situation proactively and seeking advice early, you can often avoid this outcome.

If your business is showing signs of financial distress and you have an outstanding Division 7A loan, it’s essential to get advice as soon as possible. “No one anticipates insolvency,” Adam explains, “but getting help sooner rather than later can provide you with more options and potentially prevent escalation.”

Seeking Professional Advice

Division 7A loans offer flexibility, but they also carry risks if your business’s financial health takes a downturn. Understanding your obligations and working with an experienced restructuring advisor can help you navigate the complexities of liquidation, protect your finances, and find the best possible outcome.

If you have concerns about Division 7A loans or your company’s solvency, reach out to the RSM Restructuring and Recovery team for confidential advice. Our experts, including Adam, are here to help you explore your options and develop a plan tailored to your unique circumstances.

For more insights on managing financial distress and planning for the unexpected, contact your local RSM Australia office.