Loans to Directors Flashcards
(9 cards)
What is the general rule for ‘Loans to Directors’?
A company must not either:
- make a loan to a director of the company or of its holding company, OR
- Give a guarantee or provide security in connection with a loan made by any person to such a director
Unless members approve transaction by OR
What is required if a holding company wants to make a loan to a company?
The loan transaction must be approved by a resolution of the members of the holding company.
Members’ approval is also required where the company enters into certain related transaction. Give an example of one of these transactions.
A TP assigning to the company a loan to a director
What are the exceptions to the general rule on ‘loans to directors’?
Approval not required if:
- Aggregate value of loan transaction doesn’t exceed £10k
- Aggregate value of guaranteed transaction doesn’t exceed £15k.
- Company not registered in UK or is a wholly owned subsidiary.
- Funds are to be used to meet expenditure on behalf of company
- NOTE: aggregate value of transaction mustn’t exceed £50k for this to apply. - loan relates to cost of defending civil/criminal proceedings in respect of negligence, default, or breach of duty,
- loan relates to cost of defence in relation to investigation or action by regulatory authority.
What is the procedure for gaining members approval for loan transactions?
Memorandum must be made available to members prior to vote, stating:
- Nature of transaction.
- Amount of loan and purpose for which it is required.
- Extent of company’s liability under any transaction connected with loan.
- If GM: Copy must either be made available for at least 15 days prior to GM and be available at GM, or;
- If written resolution: copy must be circulated prior to vote.
What are the main 2 consequences of failing to follow the correct procedure for loans to directors?
- Transaction will be voidable at company’s request UNLESS:
- restitution is impossible
- company has been indemnified for any loss; or
- A TP has acquired rights in good faith, for value and without notice, which would be affected by avoiding transaction.
- For gains, director must account for profits, and for losses, director can be held jointly and severally liable.
- NB: UNLESS, director was unaware at the time of contravention i.e. failing to obtain approval.
How can a director avoid the consequences of failing to obtain member approval for loans?
The shareholders can affirm transaction within a reasonable period of time by OR. Thus, transaction can no longer be avoided.
What is a quasi-loan?
A loan where the creditor agrees to pay a sum for another party (the “borrower”), and the borrower is ultimately responsible for re-paying creditor.
E.g. a company paying a TP for the director’s travel and food expenses abroad and the director having to repay the company for this directly.
What is a credit-transaction?
A financial exchange where a creditor provides goods, services, or money, and the debtor promises to pay for it at a later date, often including interest.
