Does my Director loan require approval?

It is common to see a loan, quasi-loan or credit transaction between a director and their company in any given accounting period, however it is less common to see said transactions accounted for correctly and in line with laws and regulations.

As the technicalities of reporting are often confusing, it is easy to overlook certain rules which may apply, and so running the risk of unlawful accounting.

Firstly, to define the relevant terms:

LOAN: being the sum of money lent for some time to be returned in money or money’s worth from the company to a director.

QUASI-LOAN: being an indirect loan from the company to a director, achieved by the company meeting personal expenditure of the director or settling debts incurred by the director.

CREDIT TRANSACTION: being a transaction under which the company supplies goods/services to a director.

All of the above have an ‘obligation to reimburse’ and all of which are ‘loans’ for tax purposes.

LEGALITY: being ‘permission’ of shareholders required.

PERMISSION: being a written ordinary resolution from members.

Under The Companies Act 2006 s.197 – s.201, a company must not enter into any of the above transactions unless the transaction has been approved by a resolution of its members. This is often done retrospectively, but must still be granted nonetheless.

The rules differ for private companies and public companies.

PRIVATE COMPANIES:

Permission is required for loans and related guarantees given to directors of said company. For example, if a company were to be the guarantor for a director’s personal mortgage this would require member approval.

If applicable, this extends to directors of the holding company also.

Approval is not required for quasi-loans or credit transactions between private companies and their directors.

PUBLIC COMPANIES:

The definition of a public company encompasses private companies which are associated with a plc, such that one is a subsidiary of the other, or they are both subsidiaries of the same corporate body.

Member approval is required for loans, quasi-loans, related guarantees and credit transactions made by a company to a director; a director of its holding company; and a person connected with a director of the company/holding company.

For the purposes of company law, a connected person encompasses many potential people – Companies Act s.252 details this in full.

EXEMPTIONS – ALL COMPANIES:

Exemptions exist whereby member approval is not required. Approval is not required in the following circumstances:

  • Public companies – loans, quasi-loans, credit transactions and related guarantees to meet expenditure on company business (in other words, to enable the director to meet company expenditure incurred) where the aggregate < £50,000
  • Private companies – for loans < £10,000
  • Private companies – quasi-loans and credit transactions do not require member approval
  • Intra-group transactions
  • Money lent to fund a director’s defense costs for legal proceedings in connection with regulatory action or investigations
  • Loans or quasi-loans made by a money lending company in the ordinary course of the company’s business

For further information and guidance regarding the potential requirements to gain approval for your company transactions with a director please contact us here at Arnold Hill for advice on 0207 306 9100 or email us at info@arnoldhill.co.uk

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.

Written by
Poppy Clapinson
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