Loans and related transactions with directors

Loans to directors (CA 2006)

regulated transactions between company and directors requiring safeguards

Purpose of rules

protect company from abuse by directors

Types of regulated transactions

loans quasi-loans credit transactions guarantees/security

Loan

simple lending of money by company to director (s 197)

Quasi-loan

company pays third party for director with expectation of reimbursement (s 199)

Credit transaction

company provides goods/services on credit to director (s 202)

Guarantee/security

company backs or secures a director’s external loan

Companies distinction

private companies vs public/PLC-associated companies

Associated companies

s256 one company is subsidiary of another or same parent

Private company (not associated with PLC)

only s197 applies

Public or PLC-associated companies

ss198–202 impose additional restrictions

All companies rule

loans and guarantees to directors require shareholder approval (OR)

Public/PLC-associated additional rules

Loans to connected persons require approval (s 200)

Quasi-loans require approval (s 198)

Credit transactions require approval (s 201)

Guarantees/security for these transactions require approval

Connected person

includes family members or related entities of director

Example (loan)

company lends director £50,000

Example (quasi-loan)

company pays director’s personal expense to be repaid later

Example (credit)

company supplies services to director on deferred payment

Example (guarantee)

company guarantees director’s bank loan

Exceptions

ss204–209 remove need for approval in specific cases

s204 exception

company business expenditure up to £50,000

s205 exception

loans for defending legal proceedings

s206 exception

loans for regulatory investigations

s207 exception

small transactions (loans ≤£10,000 credit ≤£15,000)

s208 exception

intra-group transactions

s209 exception

money-lending companies in ordinary business

Remedy (no approval)

transaction is voidable at company’s option (s 213)

Exception to voidability

restitution impossible company indemnified or third-party rights affected

Director liability

must account for profits and indemnify company (s 213(3))

Connected person liability

also liable under s 213(4)

Affirmation

s214 shareholders can approve transaction after the event

Effect of affirmation

transaction can no longer be avoided

Defence (reasonable steps)

director not liable if took all reasonable steps to comply (s 213(6))

Defence (no knowledge)

no liability if unaware of contravention (s 213(7))

Holding company approval

required if transaction involves holding company director

Wholly-owned subsidiary exemption

no shareholder approval required

Disclosure duty

s177 director must disclose interest to board

Exception to disclosure

not required if board already aware (s 177(6)(b))

Practical approach

still disclose to ensure record in minutes

Voting restriction

interested director cannot vote or count in quorum (MA14)

Procedure (general meeting)

Memorandum required

details of transaction must be available

Inspection period

at least 15 days before meeting

Availability

at registered office and at meeting

Procedure (written resolution)

memorandum sent with resolution to members

Notice requirement

minimum 15 days for general meeting unless written resolution used

Related regulated transactions

Directors’ service contracts (ss188–189)

Substantial property transactions (ss190–196)

Loans/quasi-loans/credit (ss197–214)

General rule

shareholder approval by ordinary resolution required unless exception applies

Private company summary

only s197 applies (loans and guarantees)

Public/PLC-associated summary

additional rules for quasi-loans credit and connected persons

Key exam point

identify type of company then identify type of transaction then check approval/exceptions