Loans and related transactions with directors

Question 1

What are loans?

Answer 1

Where the company lends money to a director.

Question 2

What are quasi-loans?

Answer 2

An example of a quasi-loan would be where a company agree to pay off an outstanding account owed by a director to a third party on the understanding that the director would later reimburse the company.

Question 3

What are credit transactions?

Answer 3

This includes any transaction entered into between the company and the director where the company provides goods or services on a credit basis which will be paid for at a later date. Only the company and the director will be parties to this arrangement.

Question 4

What are guarantees or the provision of security?

Answer 4

Where a director obtains a loan from a bank and their company stands as guarantor for the repayment of the loan or the company provides the bank with security over its assets.

Question 5

Which companies do greater restrictions apply to?

Answer 5

PLC’s and LTD’s associated with PLC’s

Question 6

Which companies do less restrictions apply to?

Answer 6

LTD’s not associated with PLC’s

Question 7

When are companies ‘associated’?

Answer 7

If one is a subsidiary of the other or both are subsidiaries of the same body corporate.

Question 8

What companies require shareholder approval in relation to loans, guarantees or security for directors?

Answer 8

ALL COMPANIES.

No company may make loans to its director or to directors of its holding company or give guarantees or enter into security in connection with loans to such directors without the transaction being approved by the shareholders by ordinary resolution.

If the company is a private company that is not associated with a public company, these are the only transactions for which shareholder approval is required under the CA 2006 loan provisions.

Question 9

What companies require shareholder approval in relation to quasi loans, credit transactions and connected persons?

Answer 9

PLC’s and LTD’s associated with PLC’s.

These companies also require shareholder approval for:

Loans to a person connected to a director of the company or a director of its holding company;

Quasi-loans to, or credit transactions with their directors and directors of a holding company or persons connected with such directors; and

Guarantees or security in respect of any such loans, quasi-loans or credit transactions with their directors and directors of a holding company or persons connected with such directors.

Question 10

What are the exceptions to requiring shareholder approval?

Answer 10

Section 204: expenditure on company business (up to a maximum of £50,000);

Section 205: loans for defending proceedings brought against a director;

Section 206: loans for defending regulatory actions or investigations;

Section 207: exceptions for minor and business transactions – loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval;

Section 208: Intra group transactions; and

Section 209: Money lending companies (where the loan is made in the ordinary course of the business of the company).

Question 11

What is the position in relation to a transaction between a company and a director of the company’s holding company or a person connected to a director of the holding company?

Answer 11

The holding company will also need to approve the transaction

Question 12

What is the position in relation to a wholly-owned subsidiary?

Answer 12

Approval is not required by the members of any company which is a wholly-owned subsidiary of another company.

Question 13

What are the remedies available if shareholder approval is not obtained and no exceptions apply?

Answer 13

If shareholder approval is not obtained and no exceptions apply, the arrangement is voidable at the instance of the company unless:

(a) restitution is no longer possible,

(b) the company has been indemnified for the loss or damage suffered by it, or

(c) rights acquired in good faith by a third party would be affected by the avoidance.

The directors involved (and those so connected) are liable to account to the company for any profits made and to indemnify the company for any loss incurred.

Question 14

Does CA allow the arrangement to be affirmed?

Answer 14

CA 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period. If it is affirmed, the arrangement may no longer be avoided.

Question 15

What are the potential defences?

Answer 15

If a transaction contravenes the above and is entered into with a person connected with a director, that director will not be liable if they took all reasonable steps to ensure the company complied with those sections.

There is also a defence for any connected person (if relevant) and any director that authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.

Question 16

What disclosure is required?

Answer 16

A director would need to disclose the nature and extent of their interest to the board if they were interested in the transaction.

It is arguable that an interested director need not formally declare an interest if the other directors are already aware of it. However, it is likely to remain the practice that directors will continue to make the declaration so that it is documented in the board minutes. In addition, it will not always be obvious to the rest of the Board if the director has an indirect interest in a transaction, so directors should be advised to act cautiously.

Question 17

Under MA are interested directors allowed to vote or count as quorum?

Answer 17

No.

Question 18

Where the ordinary resolution is to be passed at a GM what is the procedure?

Answer 18

Where the ordinary resolution is to be passed at a General Meeting, a memorandum setting out the proposed transaction must be made available for inspection by members of the company both:

a) at the company’s registered office for not less than 15 days ending with the date of the meeting; and

b) at the meeting itself.

A minimum of 15 days’ notice of the general meeting held to approve the transaction will therefore have to be given to shareholders (even if the short notice procedure is followed) unless the written resolution procedure is used. You can see that this will impact on the speed with which the decision to approve the transaction or not can be made.

Question 19

Where the ordinary resolution is to be passed by way of WR, what is the procedure?

Answer 19

Where the written resolution procedure is being followed, a memorandum setting out the proposed transaction must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to the member.