Can a company lend money to one of its directors?
The law on loans to directors is found in CA 1985, sections 330 - 347 and is
very complex. Only a summary of the more important provisions can be provided
here.
The following provision applies to all companies:
sec330(2): Subject to the exceptions in sec332 - sec338, a company shall not-
(a) make a loan to a director of the company or of its holding company;
(b) enter into any guarantee or provide any security in connection with a loan made by any person to such a director.
The following additional rules apply to any 'relevant company' (i.e. PLC or company related to a PLC (sec331(6) gives detail):
Such a company may not:
(a) make a quasi-loan or enter into a credit transaction, or make any loan, quasi-loan, or credit transaction to a person connected with a director, or give a guarantee of any such transaction, or arrange for the assignment to it of any such transaction, or arrange for any other person to undertake any of the above in return for some benefit from the company or its holding company.
For definitions of the above terms, see CA 1985, sec331. In general terms an example of a quasi-loan is when the company makes a payment that the director is bound to make personally on terms that the director will repay the company later. An example of a credit transaction is when the company supplies anything other than cash to the director on terms that the director will pay for it later.
Exceptions
There are various exceptions in sec332 - sec338. The main ones are:
sec332: short term (2 months) quasi-loans up to £5,000.
sec333: inter-company loans within the same group.
sec334: loans up to £5,000 in aggregate per director.
sec335: transactions in the ordinary course of business and on the same basis as would be applied to any other person of the same financial standing not exceeding £10,000 in aggregate.
sec337: providing a director with funds to meet expenditure incurred for the purposes of the company or to enable performance of duties to the company provided approved by general meeting and not above £20,000 in aggregate.
sec338: loans or quasi loans by money lending company.
Generally all such transactions (whether lawful or not) must be disclosed in the company's annual accounts: CA 1985, sched 6, Part II
Penalties
Civil: the transaction is voidable.
Criminal: Directors of relevant companies only who authorise or permit a breach of sec330 are liable to imprisonment and/or a fine: sec342.
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