One significant new requirement in the Companies Act 2014 is the requirement for all loans to or from a company to be approved in writing. This is something directors and business advisor must now be aware of and ensure that the terms of all loans are in writing.
Any loans that are in place prior to the 1st June 2015 and the terms are not in writing should now approve the terms of these loans.
Loans to Directors and connected persons
Where a company has given a loan or quasi-loan to a director and connected person and the terms of the loan or quasi-loan are not in writing, it will be presumed that unless the contrary is proven:-
- The loan or quasi-loan is repayable on demand and
- The amount has borne interest at the appropriate rate
If the terms of the loan are partially in writing but are ambiguous to
- The time at which or the circumstances under which, the loan or quasi-loan is to be repaid
- Whether the loan or quasi-loan bears interest
Then, until the contrary is proven, the loan is repayable on demand and bears interest at the appropriate rate.
The demand for loans to be repaid may be made by taking civil proceedings against the director or connected person which is typical taken by the company itself or by a liquidator.
When should the loan be approved?
The loan or quasi-loan should be approved in writing at the time the loan is given. The terms of the loan as set out above should be in writing. The directors should approve any loans given to a director or connected person and minutes should be recorded approving the terms of the loan and whether a loan agreement should be signed.
What often happens in SME companies is the directors do not draw a salary every month and use the bank account as they need to. When the financial statements are prepared the directors determine what amount of salary will be taken and an amount is declared as a director’s loan. This loan should be approved at the directors meeting to approve and sign the financial statements. We have included a resolution in our AGM pack to approve such loans and these templates can be downloaded here.
Loans by Directors and connected persons
Similar provisions also apply to loans given by a director or connected person to a company. Where civil proceedings in which it is claimed that a director or connected person has entered into a loan or quasi-loan with a company or holding company and If the terms of the transaction or arrangement are;-
- not in writing or are in writing;
- or partially in writing; or
- are ambiguous as to whether the transaction or arrangement constitutes a loan or quasi-loan
Until the contrary is proven, the transaction or arrangement constitutes neither a loan nor quasi-loan.
Where it is proved that a loan was made to the company or holding company by a director or connected person and the terms of the loan, quasi-loan are in writing, partially in writing or wholly oral, then if; if the terms are ambiguous to-
- Whether the loan or quasi-loan bears interest, it shall be presumed that the loan or quasi-loan bears no interest
- Whether the loan or quasi-loan is secured, it shall be presumed that the loan or quasi-loan is not secured
- In the event that the loan or quasi-loan is proved to be secured the terms are ambiguous to the priority that the security concerned is to have as against the indebtedness of the company, it shall be presumed that the loan or quasi-loan is subordinate to all other indebtedness of the company
When should the loan be approved?
The terms of the loan as set out above should be approved by the directors at the time the loan is given by the directors or connected person.
Please Note:
Our CLS Insights aims to bring you practical information and news on Company Law and Company Secretarial. We cover the topics that matter to your business and give practical tips and also the benefit our experiences. Please remember this article is a guide and legal advice should always be obtained. If you have any queries please contact one of the team and we would be happy to help.
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