Directors' Loans: when are they permissible?
If directors wish to take loans from their company or use their company for other types of credit transactions, certain procedures must be followed. As a general rule, approval of the company's shareholders is normally required but there are exceptions. If a necessary resolution of shareholders is not passed then the transaction is voidable at the instance of the company and directors may be liable for any gains made. However, a transaction may be affirmed after the loan occurs if done within a reasonable time.
Shareholder Approval of Director's Loans
The basic rule is contained in section 197 of the Companies Act 2006: a company may not make a loan, give a guarantee or provide security in connection with a loan made to a director unless approval has been granted by a shareholder resolution. Where a holding company is involved, then a resolution of the holding company's shareholders may also be required.
Conditions for Shareholder Approval
The resolution to make a loan to a director cannot be passed by the shareholders until they have received a memorandum containing the following information:
1. The nature of the transaction;
2. The amount and purpose of the loan; and
3. The extent of the company's liability under any transaction connected with the loan.
Quasi-loans and Credit Transactions
If the company is a public company (or associated with one), similar rules apply to quasi-loans and other credit transactions. Quasi-loans are essentially where a company pays liabilities incurred by a director who then becomes liable to repay the company. Credit transactions are when a creditor supplies services or sells land under a hire purchase agreement, conditional sale agreement, via periodic payments or through deferred payments.
Exceptions
Shareholder approval is not required where the company provides a director with funds (up to a limit of £50,000) for expenditure on company business or to enable him to properly carry out his director's duties. Nor is it required if the funds are to assist a director with defending legal or regulatory proceedings. Minor transactions are excluded; for loans or quasi-loans the upper value limit is £10,000, for credit transactions £15,000. Other exclusions include:
· credit transactions in the ordinary course of business
· transactions with companies in the same group
· transactions by companies that operate as money-lending businesses.
If you are seeking advice on matters related to company loans to directors or company or commercial law issues in general, please contact James Crighton via e-mail or by phone on 020 7611 4848.
