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:
- Make loans to a director up to an aggregate total of £10,000.
- Ignore the prohibition if it is in the business of lending money and it makes loans to directors on terms that are no more generous than might be offered to an outsider. (A director may be given a cheap mortgage provided the terms are no better than those offered to other employees, and the loan is for the director’s only or main residence.)
- Make loans to a director of a subsidiary, or of a fellow subsidiary, so long as the director is not also a director of the lending company.
- Make loans to directors for the purpose of defending claims made against them or action brought by a regulator in connection with their position as directors. This applies to claims made by third parties or even by the company itself (though shareholders would be likely to question the company’s decision to fund the defence to its own claim).
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.