Q. We have a company that wants to loan money to another company that is not part of a group but has the same Director and shareholders? Is this possible?
Companies often find themselves in situations where they require some form of financial assistance. This may often take place by way of a loan from another company. If the two companies are not connected there is no issue with this from a Company Law perspective. It is very important however that the terms of the loan are documented in writing, as is the case with all loans.
If however, the companies involved are deemed to be connected entities as is defined in Section 220 of the Companies Act 2014 and detailed in our previous article, then this can become an issue as Section 239 of the Companies Act 2014 prohibits loans between companies which are connected and where the loan is more than 10% of the net assets of the company giving the loan. Any officer in default of this Section is guilty of a category 2 offence.
Thankfully however, there are several exemptions to Section 239 which will avoid such a breach. A very popular exemption is Intra-Group Transactions whereby loans between group companies are permitted. The question then arises whether the companies will choose traditional group structures or golden share groups. Below, we set out the differences between the two group structures:
| Traditional Group | Golden Share Group |
|---|---|
| • Can be created upon incorporation if the subsidiary is a NewCo. | • Can be created upon incorporation if the subsidiary is a NewCo. |
| • If both companies already exist the new shares in the subsidiary can be transferred to the new holding company by way of transfer/share for share. | • If both companies already exist, the golden share can be created in the subsidiary and issued to the new holding company. |
| • Company Secretarial documentation will need to be completed to execute the transfer or share for share. | • Company Secretarial documentation will need to be drafted to create the golden share and amend the constitution to include the specific rights attached to the Golden Share |
| • Stamp duty payable/relief applied if necessary. | • No stamp duty will be payable. |
| • The holding company will usually hold the more than 50% (90% in a share for share) of the issued share capital/voting shares/ordinary shares in the subsidiary. | • The holding company will typically hold a very small % of a particular class of shares in the subsidiary with specific rights attached. |
| • Shares held by the holding company will usually be Ordinary shares with full rights. | Cannot dispense with holding the AGM |
| • Loans can flow back and forth between holding and subsidiary | • Loans can flow back and forth between holding and subsidiary |
| • Audit exemption is available if the group satisfies the small group company criteria | • Audit exemption is available if the group satisfies the small group company criteria |
| • The structure can be unwound by a transfer of shares or a redemption/buyback of the shares held by the holding company (if not a wholly owned subsidiary) | • The structure can be unwound usually by way of a redemption/buyback of the shares |
| • Tax advice should always be obtained before creating a group | • Tax advice should always be obtained before creating a group |
In addition to the Intra Group exemptions, there are other exemptions available to companies such as Summary Approval Procedure and reducing the company’s net assets. As always, if you need any assistance with exploring any of the options above or would like to discuss these further, please feel free to contact me at amy@clscs.ie or on 059 9186776.
Note: The content within the newsletter is provided for information purposes only and does not constitute legal or other advice.
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