Loans to directors

The law on loans to directors is found in CA 2006, sections 197 - 225 and is very complex. Only a summary of the more important provisions can be provided here.

The following provision applies to all companies:

Sec197 CA 2006 provides that 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
unless the transaction has been approved by a resolution of the members of the company.

The following additional rules apply to any 'relevant company' (i.e. PLC or company related to a PLC (sec200 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 2006, sec199, sec202. 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 sec204-209. The main ones are:

sec204: Expenditure on comapny business (not exceeding £50,000)
sec205: Expenditure in defending proceedings
sec207: Minor and business transactions (where the aggregate value of the transaction and any other arrangements does not exceed £10,000)
sec208: Expections for intra-group transfers.

Generally all such transactions (whether lawful or not) must be disclosed in the company's annual accounts.

Penalties
Civil: the transaction is voidable (sec213)

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