Out-Law Guide 1 min. read
17 Jun 2010, 12:31 pm
This guide is based on UK law as at 1st February 2010, unless otherwise stated.
The Companies Act 2006 liberalised the law on a company lending money to its directors and, most importantly, dropped the criminal penalties if the rules were broken. Loans and similar transactions are now permitted if shareholders have given their approval. Where the loan is made by a subsidiary to a director of its parent company, the parent’s shareholders must also give consent. In either case, a memorandum setting out the terms and purpose of the loan must be made available to the shareholders before the vote.
This is a useful relaxation for smaller companies, which often found themselves tripping over the previous ban on loans to directors; a company with a larger shareholder base is less likely to risk members’ wrath trying to explain why such loans are necessary.
The requirements for shareholder approval and an explanatory memorandum do not apply in all cases. A company is free to:
If the company in question is a plc, or is in the same group as a plc, the category of transactions requiring shareholder approval is widened and includes loans to people ‘connected’ with a director (for example, family members, a trustee for a director or their associated company), ‘quasiloans’, credit transactions and related guarantees and security. Expenditure by a company on behalf of a director that is subsequently reimbursed may be caught, as may use of a company credit card for personal expenditure.
Note that even where a loan to a director is allowed without shareholder approval, it may still need to be disclosed in the company’s accounts. In other words, it is not acceptable to keep loans to a director confidential.