loans to directors
companies were illegal, carrying with them the possibility, albeit largely theoretical, of criminal proceedings. The rules on loans were radically revised on 1 October 2007. The potential illegality of illegal loans has disappeared. This article summarises the key changes. the basic rule The basic rule is that any loan or quasiloan to a director requires members’ consent. A quasi-loan arises where a director uses a credit facility of the company for their own purposes. Thus it is a quasiloan where a director uses a company credit card to buy a personal item. (The class system is retained. A shop assistant taking a ten pound note from the till and replacing it with an IOU is pilfering; a director using a company Barclaycard to buy a bottle of whisky is taking a quasi-loan.) There are additional restrictions where the credit is given by a public company or a company associated with a public company. permitted loans There are a number of transactions which may be permitted by the board of directors without reference to the members. In particular, members’ approval is not needed for: loans, quasi-loans, credit transactions and related guarantees or security to meet expenditure on company business; thus a loan to enable the purchase of a season ticket can be approved by the directors alone money lent to fund a director’s defence costs for legal proceedings in connection with any alleged negligence, default, breach of duty or breach of trust by them in relation to the company or an associated company or similar assistance in connection with regulatory
A basic rule of English company law is that generally companies should not make loans or otherwise extend credit to their directors. The reason is clearly because the director involved is in a clear conflict situation between their interest in themselves and their duty to the company. On 1 October 2009 this will become an express statutory duty owed by a director to
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Mike Griffiths guides you through important changes in legislation relating to company loans to directors.
their company. Until then it remains simply an equitable rule. The provisions of the Companies Act 1985 regarding loans were needlessly complex, depending upon whether the company was relevant or nonrelevant. A relevant company was one which was either public or in a group containing a public company. Unlawful loans by relevant
in practice December 2007
features
‘The changes regarding directors’ loans represent a welcome improvement in the law. However, considerable complexity remains and it must be regarded as a great shame that there was not further simplification.’
action or investigation regarding a director; thus money can be lent by the board to a director of a financial services company to enable him to defend proceedings against themselves by the Financial Services Authority. However, the loan must be on terms that it is to be repaid if the director concerned is convicted in the case of criminal proceedings or otherwise found liable. In the case of a loan to defend regulatory proceedings there is no requirement for the loan to be repaid by the director even where they are found liable small loans and quasi-loans to a director or to a connected person so long as these do not exceed £10,000; however, if the loan or quasi-loan is by a public company or by a company associated with a public company (i.e. a company in the same group as the public company) to one of its directors or to a director of its holding company, this must be approved by an ordinary resolution of its members small credit transactions so long as these do not exceed £15,000; thus a hire purchase agreement of up to £15,000 can be entered into by a company for one of its directors credit transactions in the ordinary course of business; thus a bank can allow credit to a director so long as this is done in the ordinary course of business. This implies that the company not only makes such loans but also that the value of the transaction is no better than the company would have offered to a person of the same financial standing but unconnected with the company. To this latter rule there is an exception. If a money lending company has a house purchase scheme which is available to its employees at a reduced rate of interest, the same rate may be enjoyed by a director. In such a case the loan must be either for the purchase of the director’s only or main residence or for the purpose of improving such a residence or the land enjoyed with it. credit transactions A credit transaction arises where one party supplies or sells goods or land under a hirepurchase or conditional sale agreement; leases or hires land or goods in return for periodical payments; or otherwise disposes of land or supplies goods or services on the understanding that payment is to be deferred. Neither a public company nor a company associated with a public company may enter into a credit transaction as creditor for a director or a person connected with a director unless the transaction has been approved by members of the company other in the instances outlined above. other loans Any loan, other than the permitted loans described above, by a company to one of its directors or to a director of its holding company must be approved by an ordinary resolution of its members. In the case of private companies it can be passed by the new style written resolution. Basically this means counting members’ written votes on the basis of one vote per share. Once a majority of such votes have been received by the company the resolution is deemed to have been passed. Thus if a company has 1000 shares, an ordinary resolution is passed by written resolution once 501 positive votes have been received by the company.
connected persons Similar rules regarding members’ approval apply in the case of a loan or quasi-loan by a public company or by a company associated with a public company for a person connected with a director. In essence a connected person is a director’s spouse or civil partner, their child (of any age) or step-child (up to the age of 18), their parents, a person with whom they live as a partner in an enduring family relationship, a company in which the director has a 20% shareholding or a trustee for any of these. permitted transactions Finally there is a general exception in all circumstances that members’ consent is not needed where a loan or quasi-loan, when aggregated with any other such transactions, does not exceed £10,000. This applies also to quasi-loans to connected persons. Nor is consent needed in the case of a credit transaction entered into by a public company or a company associated with a public company where the credit, when aggregated with any other such transactions, does not exceed £15,000. The three permitted loans for performance of duties, small loans and quasi-loans, and small credit transactions must not aggregate more than £50,000 for a single director. Thus if a small loan of £10,000 has been made to a director, a loan for the performance of his duties cannot go above £40,000. conclusion The changes regarding directors’ loans represent a welcome improvement in the law. However, considerable complexity remains and it must be regarded as a great shame that there was not further simplification. Mike Griffiths – lecturer and writer on commercial law
in practice December 2007
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