COMPANIES ACT 2014 – DIRECTORS’ LOANS AND UNLIMITED LIABILITY

LOANS TO DIRECTORS

Under the Companies Act 2014 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 circumstances:

1. The value of the arrangement is less than 10% of the company’s relevant net assets as determined by its latest statutory financial statements as laid before its AGM. Where the company’s net assets decrease and the loan comes to represent more than 10% of the company’s net assets, then the company and the director must take reasonable steps to reduce the balances outstanding such that they are less than 10%. This must be done within two months of the director becoming aware or ought reasonably to have become aware of the position
2. The arrangement is a reimbursement of the director’s expenses which are properly incurred in the discharge of his duties as an officer of the company
3. 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 nor the terms better than that which the company would offer to an ordinary person taking out the same loan
4. The arrangement is with a group company (holding company, subsidiary or sister company)
5. The relevant Summary Approval Procedure (SAP) is followed with regard to permitting a company to enter into a loan, quasi-loan or a credit transaction or to enter into a guarantee or provide security in connection with a loan, quasi-loan or a credit transaction to a director or persons who are connected to the director.

The SAP procedure is:

1. A Declaration is made by at least a majority of the board of directors and delivered to the Companies Registration Office (CRO) within 21 days of the loan being made.

The Declaration must set out:

• the circumstances in which the arrangement is to be entered into
• the nature of the arrangement
• the name of the person to or for whom the arrangement is to be made
• the purpose for entering into the arrangement
• the nature of the benefit which will accrue to the company from entering into the arrangement and
• that the declarants have made full inquiry into the affairs of the company and having done so they have formed the opinion that the company will be able to pay or discharge its debts and other liabilities in full as they fall due during the period of 12 months after the date of the relevant arrangement.

If the prescribed time-frame is not adhered to the loan will be in breach of the Act.

2. The members must pass a special resolution not more than 12 months prior to the loan being made giving the directors authority to make the loan.

3. The Declaration can be made on the same day as the resolution is passed and in any event the Declaration must be made at a meeting of the directors held not more than 30 days before the meeting of the members at which the resolution is passed.

Before the Companies Act 2014 personal liability for all or some of the company’s debts only applied to an individual who benefits from a loan in circumstances where:

• the company is wound up and is unable to pay its debts and
• the Court considers that the arrangement has contributed materially to the company’s inability to pay its debts or has substantially impeded the winding up of the company.

However the new Act provides that where the directors make a Declaration under SAP without having reasonable grounds to believe that the company will be able to pay or discharge its debts and other liabilities in full as they fall due during the period of 12 months after the date of the relevant act, the Court may on the application of the Director of Corporate Enforcement, a liquidator, creditor or member declare that the directors shall be personally responsible, without any limitation of liability for all the debts of the company. Where a company is wound up within 12 months of the Declaration, there is a rebuttable presumption that the directors did not have reasonable grounds.

The use of SAP to legalise a director’s loan arrangement will expose all directors to unlimited personal liability for the debts of the company. Prior to utilising SAP to legalise an activity, the directors should carefully consider that they may be exposing themselves to unlimited liability.

LOAN EVIDENCE

The basic principle in the Act is that if the terms of the loan are not set out clearly in writing (or are set out in writing but are not sufficiently clear), then it shall be presumed, until the contrary is proven, that:

• the loan is repayable on demand and
• until such time as the loan is repaid, it has borne interest at the appropriate rate. The appropriate rate as per the Act is 5% or as may be specified by Ministerial Order.

There are no changes to the tax provisions that apply to loans to directors so benefit in kind and income tax will still have to be paid.

LOANS BY DIRECTORS

The Act sets out the various rules regarding loans by directors to the company. Where the terms of any transaction or arrangement by a director to the company or the holding company are not set out clearly in writing or are ambiguous as to whether the arrangement constitutes a loan or quasi-loan, then it is presumed that the transaction constitutes neither a loan or a quasi-loan and instead constitutes a gift or capital contribution.

Where it is proved that the transaction does in fact constitute a loan but where the exact terms are ambiguous then depending on which terms are ambiguous the loan:

• may be deemed to bear no interest
• may be presumed not to be secured or
• is proved to be secured but the terms are ambiguous with regards to its priority then it may be deemed to be subordinate to all other debts of the company.

Make sure that you seek professional advice to avoid becoming personally liable for all the debts of the company.