Proceed with caution before taking a loan from a company

The legislation regarding loans and transactions between companies and directors is contained in Volume 1 Part 5 Duties of Directors and Other Officers. The main sections are 219, 220, 236 – 248.  The main legislation is below and you can click here for access to the full section from the Companies Act 2014.

FRS102 should also be reviewed regarding the provisions contained in that standard regarding loans to directors and connected persons.

The rules regarding loans to directors and connected persons are similar to what was contained in Part III of Companies Act 1990. Most of those sections have been repeated in the new Act however some new additional requirements have been added. These include:-

  • New evidential procedures required for loans to or from directors and connected persons
  • The Summary Approval Procedure may be used to approve loans in excess of 10% of the relevant assets & does not require an auditor to sign off on
  • Personal liability without limit for the debts of a company being wound up for any person who benefits from a loan, quasi-loan, credit transaction, guarantee or security

The prohibition for giving loans to directors or connected persons is contained in Sec 239. This article will highlight:-

  • The main definitions and the applicable parties
  • Evidential procedures required
  • The general rule that prohibits loans to directors & connected persons
  • The exceptions
  • Breaches and personal liability

The main definitions are contained in Sec 219 including:-

  • Quasi-loan
  • Credit transaction
  • Value of a transaction or arrangement
  • Relevant Assets (Sec 238 (2))

Connected Person

One of the most common ways of breaching directors’ loans is giving a loan to a company controlled by a director. The definition of connected persons (Sec 220) has been expanded from the previous definition and is defined as a person is connected with a director of a company if, but only if, the person (not being himself or herself a director of the company) is—

  1. a) that director’s spouse, civil partner, parent, brother, sister or child (including child of the directors civil partner);
  2. b) a person acting in his or her capacity as the trustee of any trust, the principal beneficiaries of which are that director, the spouse (or civil partner) or any children of that director or any body corporate which that director controls; or
  3. c) in partnership with that director

Body Corporate Controlled by a Director

A director of a company controls a body corporate if, but only if, he or she is, alone or together with any other director or directors of the company or any person connected with the director or such other director or directors—

  1. a) interested in one-half or more of the equity share capital of that body; or
  2. b) entitled to exercise or control the exercise of one-half or more of the voting power at any general meeting of that body.

Voting power exercised by a director shall include references to voting power exercised by another body corporate which that director controls.

Evidential Provisions for Loans to Directors and Connected Persons

The Act sets out new evidential provisions for loans given to directors and connected persons. Sec 236 of the Act provides where civil proceedings in which it is claimed that a company has made a loan or quasi-loan to a director or connected person and the terms of the loan or quasi-loan are not in writing then it shall be presumed that

  1. a) the loan or quasi-loan is repayable on demand, and
  2. b) for any period before repayment of the amount of the loan or quasi-loan the amount or part has borne interest at the appropriate rate

If the terms of the loan or quasi-loan are in writing or partially in writing but-

  1. a) the terms are ambiguous to the time at which, or the circumstances under which the loan or quasi-loan is to be repaid, then it is presumed that the loan or quasi-loan is repayable on demand
  2. b) if those terms are ambiguous to whether or the extent to which the loan or quasi loan bears interest, then it shall be presumed the amount or part has borne interest at the appropriate rate.

Evidential Provisions of loans by directors or connected persons to a company

Similar provisions also apply to loans given from a director or connected person to a company. Sec 237 provides 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;-

  1. a) not in writing or are in writing;
  2. b) or partially in writing; or
  3. c) are ambiguous as to whether the transaction or arrangement constitutes a loan or quasi-loan

until the contrary is proven, that 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;-

  1. a) 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
  2. b) The terms are ambiguous to whether the loan or quasi-loan is secured, it shall be presumed that the loan or quasi-loan is not secured
  3. c) 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

Prohibition of loans to directors and connected persons

Sec 239 provides a company shall not:-

  1. a) make a loan or a quasi-loan to a director of the company or of its holding company or to a person connected with such a director,
  2. b) enter into a credit transaction as creditor for such a director or a person so connected,
  3. c) enter into a guarantee or provide any security in connection with a loan, quasi-loan or credit transaction made by any other person for such a director or a person so connected.

The Exceptions to Sec 239 rules are:-

  1. 10% Rule

Sec 239 does not prohibit a company entering into an arrangement if the value of the arrangement or in the case of there being other arrangements entered into by the company, the total amount outstanding under the arrangements is together less than 10 per cent of the company’s relevant assets

The amount of a company’s relevant assets (net assets) shall be determined in accordance with Sec 238(2). There shall not be reckoned any arrangement entered into in accordance with the Summary Approval Procedure.

  1. Reduction in the amount of the company’s relevant assets

Where the total amount outstanding under any arrangement comes to exceed 10% of the company’s relevant assets for any reason but in particular because the value of those assets has fallen, where the directors of a company become aware or ought to become aware, it shall be the duty of the company, its directors and any persons for who the arrangements were made, shall amend the terms of the arrangements so that the total amount outstanding under the arrangements again falls within 10% of the relevant assets. This must be done within 2 months after the date that the directors become aware or ought to reasonably become aware of the situation.

  1. Summary Approval Procedure to permit loans

Sec 239 does not prohibit a company from making a loan, quasi-loan, entering into a credit transaction, guarantee or providing security if the Summary Approval Procedure is followed. This does not require an independent person’s report which was required in the 1990 Act. Care needs to be taken before the directors proceed with the SAP as they may be held personally liable for the debts in full of the company in the event the company goes into liquidation in the following 12 months after the transaction.

  1. Intra-group transactions

Sec 239 does not prohibit a company from making a loan, quasi-loan, entering into a credit transaction, guarantee or providing security to any body corporate which is its holding company, subsidiary company or subsidiary of its holding company.

  1. Directors Expenses

Sec 239 does not prohibit a company from providing any directors with funds to meet vouched expenditure properly incurred  for the purposes of the company or enabling him or her to properly perform his or her duties. Any liability for such transactions shall be discharged by him or her within 6 months after the date on which it was incurred.

  1. Business transactions

Sec 239 does not prohibit a company from making a loan, quasi-loan, , entering into a credit transaction, guarantee or providing security if the following conditions are satisfied

(a)        the company enters into the transaction concerned in the ordinary course of its business, and

(b)        the value of the transaction is not greater, and the terms on which it is entered into are no more favourable, in respect of the person for whom the transaction is made, than that or those which—

(i) the company ordinarily offers, or

(ii) it is not unreasonable to expect the company to have offered, to or in respect of a person of the same financial standing as that person but unconnected with the company.

Breach of Sec 239 voidable at instance of the company

If a company enters into a transaction or arrangement in breach of Sec 239 it shall be voidable at the instance of the company unless restitution of the money or asset is no longer possible.

Personal Liability for company debts

If a company is being wound up and is unable to pay its debts, and a court considers that any arrangement of a kind described in section 240(2)(a) has contributed materially to the company’s inability to pay its debts or has substantially impeded the orderly winding up of it, the court, may make a declaration that any person for whose benefit the arrangement was made shall be personally liable, without any limitation of liability, for all or such part as may be specified by the court, of the debts and other liabilities of the company.

The court shall have particular regard to whether and to what extent, any outstanding liabilities arising under any arrangement referred to in subsection (1) were discharged before the commencement of the winding up.

In deciding the extent of any personal liability the court shall have particular regard to the extent to which the arrangement in question contributed materially to the company’s inability to pay its debts or substantially impeded the orderly winding up of the company

Offence for breach of Section 239

If a company enters into a transaction or arrangement that breaches section 239, any officer of it who is in default shall be guilty of a category 2 offence which is a reportable indictable offence.

Conclusion

Many directors feel that the old provisions were too onerous so they will not be enamoured with these new provisions that place additional requirements on directors. However directors should always be reminded that companies are separate legal entities and whilst they enjoy the benefits of limited liability, income generated by a company belongs to the company and used in the bested interests of that company.

Checklist for Directors Loan

  • Does the transaction fall under the remit of Sec 239?
  • Beware of another company being a classed as a connected person
  • Does the transaction fall under one of the 6 exceptions?
  • Approve the terms of the transaction in writing which should include the time for repayment, whether it bears interest, is secured and the priority of the security
  • Educate directors on the new provisions and get into practice of approving loans in writing
  • Auditors should be aware of the new provisions and are required to report any breaches to the ODCE
  • Review the provisions of FRS102

How Can CLS Help

We can advise of the rules regarding directors loans and also prepare the necessary resolutions to the approving the fiving or receiving a directors loan. For more information please contact one of the Co Sec Team on 059 9186776 or cosec@clscs.ie

 

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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