The Companies Act 2014 (the “Act”) retains the restrictions in place under the previous companies legislation regarding loans to directors and persons connected with directors and introduces a new concept of presumptions about undocumented loans to or from directors and persons connected with directors. Care should be taken:
- To ensure that where a company advances a loan to, or gives security for a loan to one of its directors, or to a person connected with one of its directors, that the arrangement complies with the provisions of the Act; and
- To document all loans to or from directors and persons connected with directors are properly documented, so that the presumptions against the director or person connects with the director do not apply.
General prohibition on loans by companies to directors or connected persons
The general rule of the Act with regards to loans, quasi-loans, credit transactions and the provision of security for loans in favour of directors of a company or of its holding company or persons connected to such directors, is that such transactions are prohibited except under the following circumstances:
- the value of the arrangement is less than 10% of the company’s relevant assets;
- the relevant Summary Approval Procedure with regard to permitting loans to directors is followed;
- the arrangement is with a group company (i.e. holding company, subsidiary or sister 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.
Any transaction which breaches the prohibition is voidable at the instance of the Company.
Presumptions regarding loans between directors or connected persons and a company or its holding company
The Act introduces certain presumptions regarding loans to or by directors or connected persons. The presumptions are given effect during relevant proceedings i.e. civil proceedings in which it is claimed a loan has been made.
Loans made by directors or connected persons to a company or holding company:
The Act provides that if it is claimed that a director of the company or the company’s holding company (or a person connected with a director) has entered an arrangement that constitutes a loan to that company or its holding company, and the terms of the transaction either:
- are not in writing, or
- are in writing, or partially in writing, but are ambiguous as to whether the transaction or arrangement constitutes a loan or not,
then it shall be presumed, until the contrary is proved that the arrangement does not constitute a loan to the company or its holding company. The Act does not specify what the arrangement is if it is not a loan. It is thought however that the arrangement would be treated as a gift or a capital contribution to the company. This could have unforeseen tax implications for the director in question.
Where it is proved that the transaction does in fact constitute a loan but the terms as to interest or security are ambiguous then, depending on which terms are ambiguous:
- the loan is deemed to bear no interest;
- the loan is presumed to not be secured; or
- where it is proved to be secured but the terms are ambiguous with regards to its priority, then it is deemed to be subordinate to all other debts of the company.
Loans by a company or holding company to its directors or connected persons:
The Act provides that if a company has made a loan to a director of the company, a director of its holding company or a person connected with such director that:
- the terms of the loan are not in writing; or
- the terms of the loan are in writing but are ambiguous as to the time at which, or the circumstances under which, the loan is repayable or whether, or the extent to which, the loan bears interest,
then it is presumed in favour of the company, until it is proved to the contrary, that the loan is repayable on demand that until such time as the loan is repaid, it has borne interest at the appropriate rate (5% per annum or such other rate as is set by the Minister).
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