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Restrictions on Loans to Directors

Restrictions on Loans to Directors

The General Position

The Companies Act 2006 sections dealing with loans to directors have removed the general prohibition on such loans, replacing it instead with a requirement for loans to directors to be subject to shareholder approval.

There are some legal rules which restrict your company's power to give loans to directors. The restrictions apply to loans made by a company to a director or a director of a parent company (but not to a director of a subsidiary).

A guarantee or security given by a company to secure the debts of such a director is also restricted. Companies in a group which includes a public company face additional restrictions with respect to quasi-loans (an obligation to pay someone who has settled debts on your behalf) and a credit transaction such as hire purchase and other extended credit arrangements.

Exceptions to the Requirement of Shareholder Approval

There are several limited exceptions. These include:

1. A loan or quasi-loan of less than £10,000 in total
2. A credit transaction of less than £15,000
3. An arrangement to fund a director's expenditure for company purposes up to £50,000.

The values quoted above are aggregate values, meaning that even if the loan is for a small amount, perhaps only £1,000, if that loan would bring the total amount loaned to the director to over the quoted value it would require shareholder approval.

Arrangements between companies in the same group which might otherwise contravene the restrictions are generally permitted.

Risk Management

It is not uncommon to find that you have inadvertently broken the rules problems usually come to light at the yearly audit. Try to monitor practices which might inadvertently lead to default such as expenses floats and if need be, discuss potential problem areas with your accountants.

This is a most complex area requiring expert legal advice if you foresee difficulties. Proceedings can be brought both of a civil (a claimant who has suffered loss seeking redress) and criminal nature.

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