In this update on the Companies Act 2014 (the “Act”) we discuss the topical issue of loans/advances between a company and its directors.
The general rule of the Act as laid out in Section 239 of Part 5, is that loans, quasi-loans* or other arrangements, such as entering into a transaction as a creditor on behalf of the director of the company or of its holding company, or providing guarantees or any other security in connection with a loan, quasi-loan or credit transaction, are prohibited to directors or parties connected to directors except under the following five circumstances:
- the value of the arrangement is less than 10% of the company’s relevant assets;
- the arrangement is with a group company (i.e. holding company, subsidiary or sister company);
- the arrangement is a reimbursement of the director’s expenses (i.e. expenses properly incurred in the discharge of their duties as officers of the company);
- the arrangement is where the company enters into the transaction in the ordinary course of business and the value of the transaction is not greater than that which the company would offer to an ordinary person, taking out the same loan; or
- the relevant Summary Approval Procedure (“SAP”) is followed with regard to permitting a company to enter into a loan or quasi-loan, or a credit transaction or to enter into a guarantee or provide security in connection with a loan, quasi-loan or credit transaction to a director or persons connected to the director.
Summary Approval Procedure (SAP)
An innovation of the Act is the introduction of the SAP. The SAP permits companies, in a cost effective and efficient way, subject to certain procedures being executed, to perform transactions or enter into arrangements that may previously have been deemed prejudicial to the interests of the owners or creditors of a company - in this case permitting a company to make a loan or quasi-loan, enter into a credit transaction, or enter into a guarantee or provide any security to directors or persons connected to directors as prohibited under Section 239 of the Act.
The Companies Act 2014 sets out very specific rules regarding loans and advances to and from directors and the importance of documenting such transactions. Transactions with directors of a company must be given due consideration prior to entering the transaction to ensure that the requirements of the Act are met. Inadvertent breaches are commonplace and, under the new Act, may have greater implications for directors including unlimited liability for the company’s debts and liabilities.
The introduction of unlimited liability for directors in certain circumstances greatly increases directors’ accountability and directors should be made aware of the implications of this change prior to using the SAP to validate a prohibited activity.