The Companies Act 2014 made some key changes to director’s loans.
One such, as we previously indicated in an article in July 2015, is that the Act provides that loans between a company and a director or other connected person must be fully documented.
Loans Made By The Company To The Director
Any loan that a company makes to a director or connected person must be fully documented in writing. If not, it will be presumed that the loan is repayable on demand and that an “appropriate rate” of interest applies.
Even where the loan does have an agreement in writing in place, if there is any ambiguity in the terms as to the timing or circumstances for repayment then the loan is still presumed to be repayable on demand. And if there is any ambiguity over whether the loan bears interest or the extent to which it bears interest, then the presumption is that an appropriate rate of interest applies.
The consequence of these rules is that in the event of civil proceedings against the company, if the director’s loan is not properly documented then the director could be liable for immediate repayment of the debt plus interest.
Loans Made By The Director To The Company
New rules were introduced where a director makes a loan to the company. Unless the money advanced by the director is fully documented as a loan then the presumption will be that it isn’t! Instead the loan will be treated as a gift or a capital contribution.
If the documentation does not specify otherwise then the default presumption is that the loan is interest free and unsecured. Even where the documents show that the loan is secured, then unless the contrary can be proved it’s presumed to rank lower than all other indebtedness of the company.
Again if there is an ambiguity in the terms then the default presumptions apply.
The consequence of these rules is that in the event of civil proceedings against the company:
- If there is no documentation then the director may lose his loan, just as he might lose his investment in the share capital of the company; or
- If there is documentation in place, but it is inadequate, then the director will get no interest on his loan and the principal only is repaid after other creditors are paid.
Conclusion
In view of the potential consequences it is important to properly document any loans that are made between a company and its directors. In all cases, but especially where matters are not straightforward, we would recommend seeking our professional advice immediately to ensure that all positions are protected.