In businesses, especially owner-managed businesses in which the directors are also the shareholders, the line between company funds and personal funds can become somewhat blurred.
It is a fact of business life that directors utilise excess funds from their business to fund personal expenditure and therefore, enter the area of director loans. In many instances, these loans are short-term and are repaid within a very short period of time. In other cases, the loans may persist and remain on the balance sheet of the company for longer periods.
The general rule under the Companies Act 2014 (as laid out in Section 239 of Part 5), is that a company shall not make any loans or quasi-loans to a director or a connected person (a connected person being a spouse, parent, child, brother, sister plus other defined relationships).
The Act then exempts the following five circumstances from this prohibition:
- The value of the loan does not exceed more than 10% of the Net Relevant Assets of the company (as defined)
- The loan is an intra-group loan – within a group company (ie a holding company, subsidiary or a sister company)
- The loan is in the normal course of business of the company
- The loan represents amounts paid in advance in respect of vouched directors’ expenses
- The relevant Summary Approval Procedure (“SAP”) is followed
A Summary Approval Procedure is to be used by a company in situations where none of the exemptions set out in Sections 240 to 245 are available. This is very useful and represents an under-utilised provision brought into being in the 2014 Act. It is a very important tool in ensuring that an anticipated director’s loan does not fall foul of the prohibitions and expose the directors and the company.
While the provisions on director loans in the Companies Act 2014 have allowed a degree of greater flexibility, it is critical that such loan are planned for and enabled in advance of making, this minimised or eliminating the risk of breaching the relevant provisions.
Breaching of the provisions on directors’ loan can result in a Category 2 Offence within the Act. Further, and perhaps of greater significance, if a company becomes insolvent and is wound up and unable to pay its debts, then the Courts can declare the director or person so connected, as liable for the debts of the company, subject to certain provisions contained in Section 247.
Crowe Horwath has broad experience of advising on directors’ loans, assisting with documentation to formalise and approve loans, and on the application of the Summary Approval Procedure to qualify a loan that would not otherwise be allowable under the Act.
For assistance in utilising the Summary Approval Procedure or any other queries relating to Directors’ loans contact a member of our Audit team to assist you.