Loans to Directors under Companies Act 2006

     

Loans to Directors under Companies Act 2006

There are strict rules governing the circumstances in which directors may cause their companies to make loans or enter into other types of beneficial financial arrangement with them or people connected with them. A director who fails to observe these rules may be required to compensate the company.

The basic rule on loans is set out in section 197(1) CA 2006. This says that a company may make a loan to a director of the company or its holding company, or give any guarantee or provide security in connection with a loan made by any person to a director, only if the transaction has been approved by a resolution of the company’s members (and, where the transaction is in favour of a director of the holding company, by a resolution of the members of the holding company). (No member approval is required in the case of a transaction entered into by a company which is a wholly-owned subsidiary of another UK company).

Before any such resolution can be passed, the company must prepare a memorandum setting out the following:

• the nature of the transaction

• the amount of the loan and the purpose for which it is required

• the extent of the company’s liability under any transaction connected with the loan.

This memorandum must be made available to members before they consider the resolution. Where the resolution is to be passed at a formal general meeting, the memorandum must be made available for inspection at the company’s registered office for no fewer than 15 days ending with the date of the meeting, as well as at the meeting itself. Where the resolution is to be passed by means of a written resolution, the memorandum must be sent or submitted to every member eligible to vote either before or at the same time as the resolution itself is sent to them.

In addition to the basic prohibition on the making of a loan, section 203 CA 2006 says that a company may not do either of the following things without obtaining prior approval from its members:

• take part in any arrangement whereby another person provides the prohibited loan and that other person obtains some benefit from the company or an associated company via the arrangement; or

• arrange for the assignment to it or assumption by it of any rights, obligations or liabilities under a transaction which, had it been entered into by the company, would have required members’ approval.

Approval by the members of any arrangement falling within the scope of section 203 must follow the same process as outlined above for the granting of a loan. (Again, no approval is required if the company is a wholly-owned subsidiary).

Exceptions

There are a number of derogations from the basic rule in section 197(1) which mean that, in the circumstances specified, companies need not obtain the approval of their members before making a loan. The derogations are as set out in (a) to (g) below.

(a)  Where the company provides a director of a company or of its holding company, or a person ‘connected’ with any such director, with funds to meet expenditure already incurred or to be incurred by the director either for the purposes of the company or for the purpose of enabling the person concerned to perform his or her duties as an officer of the company; or

(b)  Where a company does anything to enable a person covered in i) to avoid incurring any such expenditure (section 204 CA 2006).These derogations allow a company to advance funds to a director in respect of expenditure to be incurred on company business and to reimburse him or her in respect of expenditure already occurred. Funds provided must not exceed the value of the transactions entered into and are subject to an aggregate limit for all ‘relevant transactions’ (see below) of £50,000.

(c)  Where the combined value of the loan and all other relevant transactions or arrangements (see below) does not exceed £10,000 (section 207 CA 2006).

(d)  Where a company makes a loan to an associated body corporate or gives a guarantee or provides security for a loan to an associated company (section 208 CA 2006).

(e) Where a company provides a loan to a director of the company or its holding company to enable that person to meet expenditure incurred or to be incurred in defending him or herself in any investigation by a regulatory authority or any action proposed to be taken by such an authority in connection with any alleged negligence, default, breach of duty or breach of trust by the director in relation to the company or any associated company, or to enable any such director to avoid incurring any such expenditure (section 206 CA 2006).

(f)   Where the company provides a director of the company or its holding company with funds to meet expenditure incurred or to be incurred by him or her in defending any criminal or civil proceedings in connection with alleged negligence, default, breach of duty or breach of trust by the director in relation to the company or any associated company, or in connection with an application for relief from the court under section 661 or 1157 CA 2006 (section 205 CA 2006).

Derogation under section 205 is only possible, however, on the terms that:

• the loan must be repaid (or as the case may be the company’s liability is to be discharged) in the event of the director being convicted in the proceedings, judgment being given against him in the proceedings or the court refusing to grant him relief on an application for relief

• repayment or discharge must take place no later than the date when the conviction, judgement or refusal to grant relief becomes final.

(g) Where a company which is a ‘money lending company’ (ie a company whose ordinary business includes the making of loans) enters into a transaction with a director in the ordinary course of its business and the value of the transaction is not greater, and its terms are not more favourable, than it would be reasonable to expect the company to offer to a person unconnected with the company (section 209 CA 2006).

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