#14697 - Loans To Directors - Business Law and Practice

Loans to Directors

Company and Transaction

Identify whether the company is a Plc, a Ltd, or a Ltd connected with a Plc.

Identify the nature of the transaction: is it a loan, quasi-loan, guarantee, security or credit transaction.

Identify who benefits from the transaction: a director, a director of a holding company or a person connected to one of the above (s.252 & s.253)

Shareholder Approval

Shareholder approval is required whenever a loan is made from a company to its director (s.197(1)(a)); in addition approval is required for loans made to the director of a holding company (s.197(2)).

The following restrictions only apply to Plcs or Ltds connected with a Plc. Shareholder approval is required whenever a loan is made to a connected person to a director (s.200(2)(a)); approval is required for loans made to a connected person of a director of a holding company (s.200(3)).

No approval is required where a holding company gives a loan to a connected person of the Ltd company’s director.

The Ltd company will not need to give any approval if they are exempt under s.197(5) or s.200(6) if they are a wholly owned subsidiary. In this case only the holding company will need to give approval (s.197(2) & s.200(3)).

These rules also apply to credit transactions (s.201(2)(a)) and quasi-loans (s.198(2)(a) & s.199(1)).

Shareholder Resolution

Shareholder approval must be completed using an ordinary resolution (s.281(3)) before a company can do the above.

The resolution must not be passed until a memo containing information relating to the amount, purpose and nature of the transaction is detailed (s.197(4)). The memorandum of the term of the loan must be available for 15 days before the meeting (s.197(3)(a)-(b)).

The resolution can be passed by a written resolution as long as the proposed terms of the loan is attached to the resolution (s.197(3)(a)-(b)).

Statutory Exceptions

If loans do not exceed 10,000 then no shareholder approval is required (s.207(1)).

If credit transactions do not exceed 15,000 then no shareholder approval is required (s.207(2)). Credit transactions which are in the court of business and on no more favourable terms than would have been offered to a third party then no shareholder approval is required (s.209(1)).

Money lending companies that act in the course of business and give loans on no more favourable terms that would be offered to the public do not need shareholder approval (s.209).

Director’s Duties

The directors must consider their duties under s.171-177 when proposing loans to directors (especially s.172 and s.177). Failure to comply with these duties carry their own list of consequences and sanctions in s.178(1).

Sanction for Failure

If the directors do not get shareholder approval for a loan to a director when it is required then civil remedies can be claimed in respect to the transactions (s.213). The transaction is voidable by the company under s.195 unless:

Restitution is no longer available (i.e. compensation/damages are no longer available);

The company has been indemnified by the directors for the loss suffered by it; this prevents the company from benefiting twice from the failure;

A third party who was not a party to a transaction has acquired bona fide rights and such rights would be affected by making the transaction void;

The company has affirmed the transaction using an ordinary resolution within a reasonable period under s.214.

Irrespective of whether the transaction is void, the director(s) who authorised the transaction are liable to account for any gain and to indemnify the company for any loss or...