The general rule is that shareholder approval by ordinary resolution is required before a company can make a loan to a director. This shareholder resolution must not be passed unless a written memorandum, setting out the nature of the transaction, the amount and purpose of the loan and the extent of the company’s liability, is made available to the members.
What transactions are caught?
The restrictions apply to four different types of transaction:
- loans,
- quasi-loans,
- credit transactions, and
- guarantees or the provision of security for any of the above.
Loans (s.197 and s.200 CA 2006)
A loan simply involves a straightforward lending of money.
Quasi-loans (ss.198 – 200 CA 2006)
The term quasi-loan is defined in s.199. An example of a quasi-loan would be where a company agreed 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.
Credit transactions (ss.201–202 CA 2006)
A credit transaction is defined in s.202. A credit transaction 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.
Guarantee or the provision of any form of security (ss.197, 198, 200 and 201 CA 2006)
This is not defined but will be reasonably self-explanatory. An example of this type of arrangement would be where a director obtains a loan from a bank and his company stands as guarantor for the repayment of the loan or the company provides the bank with security over its assets.
Which companies are restricted?
For the purposes of the CA 2006, restrictions on loans and related financial transactions between a company and a director or connected persons of that director, it is important to distinguish between private companies on the one hand, and public companies and private companies that are associated with public companies on the other.
All companies:
No company may make loans to its directors or to directors of its holding company, or give guarantees or enter into security in connection with loans to such directors, without the transaction first being approved by the shareholders.
If the company in question 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.
Public companies and private companies associated with public companies:
There are additional restrictions that apply to public companies and private companies that are associated with public companies, namely:
- Public companies or companies associated with public companies must obtain shareholder approval to make a loan to a person connected to a director of the company or a director of its holding company;
- Public companies or companies associated with public companies also need shareholder approval to make quasi-loans to, or enter into credit transactions with, their directors and directors of a holding company or persons connected with such directors; and
- Shareholder approval is also required for guarantees or security in respect of any such loans, quasi-loans or credit transactions by public companies or companies associated with public companies.
Definition of ‘associated companies’:
Under s.256, companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate. So, for example, a private company that is a subsidiary of a public company will be associated with the public company for these purposes.
Exceptions
There are a number of exceptions to the need for shareholder approval, the
principal ones being as follows:
Expenditure on company business – s.204
Shareholder approval is not required where a director is provided with a sum of money to pay for company expenses or expenses to enable him to properly perform the duties of a director.
This exception is limited to expenditure the aggregate amount of which is £50,000 or less. If the value of the transaction or arrangement cannot be ascertained, it will be deemed to exceed £50,000.
Expenditure on defending proceedings – s.205
Shareholder approval is not required where a company is providing funds (either by way of a loan, quasi-loan or credit transaction) for a director to defend proceedings in connection with any alleged negligence, default, breach of duty or breach of trust in relation to the company or an associated company or in making any relief applications in connection with s.661(3), s.661(4) and s.1157.
Minor and business transactions – s.207
Loans or quasi-loans to a director (or, under s.200, a person connected to a director) up to an aggregate amount of £10,000 can be given without the need for shareholder approval. This figure rises to £15,000 for credit transactions. There is an additional exception where the credit transaction is in the ordinary course of the company’s business and the terms of the transaction are not more favourable than the terms that the company would have offered to a person unconnected with the company. In this situation, no shareholder approval is required; this is irrespective of the value of the transaction.
Loans / quasi loans by a money-lending company – s.209
A company whose ordinary business includes the making of loans or quasiloans or the giving of guarantees or provision of security, can make any loan or quasi-loan or give a guarantee to provide security to any person; this is provided it does so under normal business terms. There is no permitted maximum amount for this.
Sanctions for non-compliance
Section 213 provides civil remedies in respect of transactions involving all companies. The transaction will be voidable at the instance of the company unless:
- restitution is no longer possible;
- the company has been indemnified for the loss or damage resulting from the transaction; or
- bona fide rights have been acquired by a third party who was not a party to the transaction and such rights would be affected.
Section 214 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 under s.213.
Irrespective of whether the transaction has been avoided, the director (and the person connected to the director, if relevant) and any other director who authorised the transaction must account for any gain made directly or indirectly from the transaction and indemnify the company for any loss or damage resulting from the transaction (s.213(3) and (4)).
Is there any defence/exemption?
If a transaction contravenes ss.200, 201 or 203 and is entered into with a person connected with a director, that director will not be liable if he took all reasonable steps to ensure the company complied with those sections (s. 213(6)).
There is also a defence under s.213(7) 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.
Wholly owned subsidiaries: approval is not required by the members of any company which is a wholly-owned subsidiary of another company.