[Question] Repayment of member's loan vs. profit share distribution

[Beancounter]

The members of a CC are in conflict regarding whether the one member's loan should be repaid from the profit of the sale of an aircraft or whether the profit should be distributed among the members in their respective member's interest ratio.

The association agreement doesn't address this particular circumstance.

Section 51 of the CC Act only refers to distributions of profits that should be made only after considering solvency and liquidity. Further, the Act stipulates that a repayment of a member's loan is not a distribution in terms of the Act so if a loan is repaid, solvency and liquidity is not a concern. No mention in the Act of whether repayment of a loan takes precedence over paying out of profit share (distributions equal to dividends in companies).

My take on this is, if the members cannot agree on whether the profit on the sale of the aircraft should be distributed as profit share or be paid to the one member to extinguish his loan, it comes down to a majority vote at a members' meeting (Section 46(c)). Only, the member wanting repayment of his loan holds 50% and the other two members 25% each member's interest.

Seems this is going to go to arbitration or court?

Any ideas?

[desA]

Would there be enough in it to buy out the offended member's share? May save you fleecer fees & protracted court case.

[Dave A]

Amazing that there is an association agreement in place that doesn't deal with the issue. The most common clause a.f.a.i.k. requires that member loan accounts are settled before distributions can be made and I've never been party to an association agreement without that clause present.

But in the absence of such a clause -

My first thought was a mediator would suggest the partners find a meeting point between the two positions - ultimately a negotiated agreement to break the deadlock.

When it comes to arbitration, a few issues that would probably be looked at for possible guidance are:
Was the loan account used to finance the asset that was sold?
Are the loan accounts of the members currently in ratio to the relative interest holdings?

I'm pretty curious as to what other members here may come up with as possible issues to consider.

[Greig Whitton]

The members of a CC are in conflict regarding whether the one member's loan should be repaid from the profit of the sale of an aircraft or whether the profit should be distributed among the members in their respective member's interest ratio.

The association agreement doesn't address this particular circumstance.

What does your agreement state regarding decision making more generally and the resolution of disagreements?

[CLIVE-TRIANGLE]

Section 51 of the CC Act only refers to distributions of profits that should be made only after considering solvency and liquidity.

The member is thus an unsecured creditor? If the distribution renders the cc incapable of repaying him then the distribution is contrary to the Act. I am assuming that there is no loan agreement in place.

[Justloadit]

It may also affect the decision, of how long the main share holder loan has been in place in relation to the other members.

If the loan was there from inception, and the other members came afterwards, then it may be time for the original loan to be met.

I remember a situation like this when I was a director some years back, where each director had loan accounts in the company. A decision was made that loans to other directors would be paid out only once all loans were relative to the percentage share holding in the company, and any future loan repayments from that point would be in proportion to the share holding in the company.

These situations usually arise from the founding member raising the capital to start the company, and new members are usually recruited by way of a reduced salary and deferred profit sharing, with the balance going into a loan account until sufficient capital is raised to maintain the business operational and running costs.

[Beancounter]

Thank you all for the good insight. I have suggested to the members that they consider settling their respective loans proportionately so that each one gets a bit of their loans repaid as there are also no loan agreements in place to specify who's loan gets preference. It was also important to take Capital Gains Tax and Income Tax into account as the CC has a large assessed loss. Lets hold thumbs and see what they decide at their next meeting.

[MarciaLU]

Thank you for your feedback. There is no association agreement in place. The member resigned without any claims and wish to be disassociated with the cc. I am under the impression that the loan for the resigning member and remaining member should be settled from the profits and the rest should be split equally. The member who resigned has a loan of 39% and the remaining member 61% Total loans or R701 000 and the profit is 49 000 No, the loan was not used to finance the assets. It was profits from the sale of 2 properties. The member who resigned did it on a formal resignation letter without any claims against the cc. The member did not stipulate that the profits or loan should be refunded on the letter. The resigning member will transfer her 50% shares to the remaining member. The remaining member has accepted the resignation without any claims..

[gac]

Good points offered Dave which make sense. some other aspects jump to mind, regardless of what the act's silence.

Profit should be accounted for fairly. If all members have a Loan Account then the profit should be distributed proportionally to all Loan Account Balances.

If only 1 Member has a Loan Account then what do the terms of that Loan Account state. If zero interest and no fixed terms of repayment, then tough and I would think that a proportional profit distribution is the way to go to settle amicably PROVIDED liquidity and solvency are not diminished beyond reason.


A majority vote is clearly not going to yield a majority result in this case.