Loans and Related Transactions with Directors Flashcards
Under CA 2006, which of the following transactions does NOT require shareholder approval in a private company (not associated with a PLC)?
A. A loan to a director of the company
B. A credit transaction with a director of the company
C. A loan where the company provides a guarantee for a director’s debt
D. A loan to a connected person of a director
B. A credit transaction with a director of the company
Explanation:
Private companies only need approval for loans and guarantees to directors (s 197 CA 2006). Quasi-loans and credit transactions only require approval if the company is a PLC or associated with a PLC (s 198 – 202 CA 2006).
What is the key difference between a loan and a quasi-loan under CA 2006?
A. A loan is a cash payment to the director, while a quasi-loan involves the company covering a director’s financial obligation to a third party
B. A quasi-loan is given directly to the director, while a loan is indirect
C. A loan must always be repaid, whereas a quasi-loan does not require repayment
D. A quasi-loan applies only to connected persons, while a loan applies to directors only
A. A loan is a cash payment to the director, while a quasi-loan involves the company covering a director’s financial obligation to a third party
Explanation:
A loan is direct lending to the director (s 197 CA 2006). A quasi-loan (s 198 CA 2006) occurs when the company pays a third party on behalf of a director, with the expectation of reimbursement.
What is the effect of a company failing to obtain shareholder approval for a director’s loan?
A. The loan becomes immediately repayable with interest
B. The transaction is voidable at the company’s discretion
C. The director is automatically disqualified
D. The company must compensate the director for losses incurred
B. The transaction is voidable at the company’s discretion
Explanation:
Under s 213(2) CA 2006, a transaction that fails to get shareholder approval is voidable unless restitution is impossible, the company has been indemnified, or third-party rights would be affected.
In which of the following situations is shareholder approval NOT required under s 204 – 209 CA 2006?
A. A £60,000 loan for a director’s personal use
B. A £5,000 loan to a director for company-related expenses
C. A £20,000 credit transaction with a director
D. A £150,000 quasi-loan to a connected person
B. A £5,000 loan to a director for company-related expenses
Explanation:
Under s 204 CA 2006, loans up to £50,000 for company-related expenses do not require approval. Loans and quasi-loans over certain thresholds do require approval.
When a company provides a guarantee for a director’s loan from a bank, what type of transaction is this?
A. A quasi-loan
B. A credit transaction
C. A guarantee or security
D. A director’s long-term service contract
C. A guarantee or security
Explanation:
Under s 197 CA 2006, a company providing a guarantee or security for a director’s debt requires shareholder approval (except for private companies not associated with a PLC).
ABC Ltd, a private company, wants to provide a loan of £20,000 to its managing director to buy a car. What must ABC Ltd do under CA 2006?
A. Proceed with the loan without restriction
B. Obtain shareholder approval before proceeding
C. Ensure the loan is under £10,000 to avoid approval requirements
D. Seek approval from the company’s auditors
B. Obtain shareholder approval before proceeding
Explanation:
Under s 197 CA 2006, any loan to a director requires approval by ordinary resolution. The £10,000 threshold applies only to quasi-loans or credit transactions (s 207 CA 2006).
A director of XYZ Ltd has asked the company to cover an outstanding £15,000 legal bill, with a promise to repay later. What type of transaction is this?
A. A loan
B. A credit transaction
C. A quasi-loan
D. A guarantee or security
C. A quasi-loan
Explanation:
A quasi-loan (s 198 CA 2006) occurs when a company pays a third-party obligation on behalf of a director, expecting reimbursement later.
DEF Ltd (a PLC) wants to provide one of its directors with a £25,000 loan. What are the legal requirements?
A. DEF Ltd can proceed without restriction
B. Shareholder approval is required
C. The loan is unlawful under CA 2006
D. Only board approval is needed
B. Shareholder approval is required
Explanation:
Under s 197 CA 2006, all loans to directors require shareholder approval. This applies to both PLCs and private companies.
A director of a PLC receives a £12,000 loan from the company without shareholder approval. What is the most likely consequence?
A. The loan is automatically written off
B. The loan is valid if it does not exceed £15,000
C. The loan is voidable, and the director may be personally liable
D. The director must resign immediately
C. The loan is voidable, and the director may be personally liable
Explanation:
Under s 213 CA 2006, an unapproved loan is voidable, and the director may need to repay profits made and indemnify the company for losses.
A PLC’s subsidiary wants to offer a £30,000 credit transaction to a director. What approval is required?
A. Only board approval
B. Shareholder approval of both the subsidiary and the holding company
C. No approval needed as it is under £50,000
D. Approval from the company’s auditors
B. Shareholder approval of both the subsidiary and the holding company
Explanation:
Under s 200 CA 2006, if a transaction involves a director of the holding company, approval is needed from both the company and its holding company.
Which of the following is NOT an exception under s 204 – 209 CA 2006?
A. Loans up to £10,000 for personal expenses
B. Loans for defending legal proceedings
C. Loans between group companies
D. Loans to finance a director’s personal home purchase
D. Loans to finance a director’s personal home purchase
Explanation:
Personal home purchases are not an exception. Loans for legal defence (s 205-206), intra-group loans (s 208), and small loans (s 207) are exceptions.
A private company (not associated with a PLC) provides a £25,000 credit transaction to a director without shareholder approval. What is the legal consequence?
A. The transaction is automatically valid
B. The transaction is voidable at the company’s discretion
C. The director is automatically disqualified
D. The company must repay the amount to the director
B. The transaction is voidable at the company’s discretion
Explanation:
Under s 213(2) CA 2006, if a company fails to obtain shareholder approval when required, the transaction is voidable unless restitution is impossible, the company has been indemnified, or third-party rights would be affected.
