By Simon O’ Connor, 8th April 2015
Under the new Companies Act 2014, loans, quasi-loans, or other arrangements are prohibited to directors or a party connected to a director except under these five circumstances:
- The value of the arrangement is less than 10% of the net relevant assets of the company.
- The arrangement is with either a holding company, sister company or a subsidiary.
- The arrangement is a reimbursement of the director’s expenses.
- The arrangement is where the company enters into a transaction in the ordinary course of business and the value of the arrangement is not greater than that which the company would offer to an ordinary person.
- The Summary Procedure Approval (SAP) is followed
SAP – The Summary Procedure Approval
The new Act introduces ‘The Summary Procedure Approval’. The SAP permits companies to perform transactions or enter into arrangements that may have previously been considered damaging to the interests of the owners or creditors of a company.
10% of net assets exception
Where a company makes a loan to a director or a party connected to the director which is less than 10% of the net relevant assets of the company, the value of that loan is determined by the company’s latest statutory financial statements as laid before its AGM.
In the situation where the company’s assets fall and the loan comes to represent more than 10% of the company’s net assets, the company and the director, or other parties involved are obligated to take reasonable actions to ensure the balance of the outstanding becomes less than 10%. This must be done within two months of any party becoming aware of the situation. If directors fail to rectify this situation within the two months, the Act states the arrangements shall become void.
Terms of the loan
When the basic principle of the loan is not set out clearly in writing, the Act introduces certain presumptions:
- The loan is repayable on demand
- The loan is interest bearing (5%)
Any director whom intends to avail of a legal director’s loan should be aware that doing so will expose all directors to unlimited personal liability for the debts of the company.
Loan by a director to a company
The Companies Act 2014 sets out numerous guidelines regarding loans by directors or a party connected to a director to the company. When the basic principle of the loan is not set out clearly in writing, the Act introduces the presumption that the transaction constitutes neither a loan nor a quasi-loan but instead is considered a gift or a capital contribution.
If you require any information on the new Companies Act 2014, please do not hesitate to contact us.