Loans and Transactions Involving Directors
Without regulation directors could potentially enter into transactions with their companies which would result in them placing their interests before those of the company, its shareholders and/or its creditors.
In addition to the giving of loans, the general prohibition also extends to:
- Companies making quasi-loans to directors or persons connected with directors
- Companies entering into credit transactions as a creditor for directors or persons connected with directors
The term credit transaction is defined in the Companies Act, as being a transaction under which the creditor:
- Supplies any goods or sells any land under a hire-purchase or conditional sale agreement
- Leases or licenses the use of any land or hires goods in return for periodical payments
- Otherwise disposes of land or supplies goods or services on the understanding that payment whether in a lump-sum or instalments or by way of periodical payments or otherwise is to be deferred
There is an obligation to disclose details of any such loans in the company’s financial statements.
General prohibition also applies to the shadow directors. A shadow director is defined by the Companies Act, as a person in accordance with whose directions or instructions the directors of the company are accustomed to act. For the purposes of transactions with directors, a shadow director is treated as though they are a director of the company, unless the directors are acting on advice given by that person in a professional capacity.
Notwithstanding the general prohibition, a company is permitted to enter into an arrangement (loan, quasi-loan or credit transaction as creditor) with a director of the company, or a person connected with a director of the company provided that, at the time the arrangement is entered into, the aggregate value of the arrangement, together with any other such arrangements already in place, does not exceed 10% of the company’s relevant assets. Please note that this exception does not apply to guarantees or to the giving of security. Moreover, the exception does not apply to loans, quasi-loans or credit transactions with a director of the company’s holding company or with a person connected with a director of the company’s holding company.
For the purposes of this exception, a company’s relevant assets are calculated as follows:
- By reference to the net assets of the company as shown in the last (if any) preceding financial statements to have been laid before an Annual General Meeting of the company, or
- In the event that no financial statements have been laid before an Annual General Meeting of the company in respect of a preceding year, the called up share capital of the company