Directors’ Loans

Background I

Loans to director and guarantees and charges for their benefit are prohibited, with exceptions which may be available subject to conditions. The prohibition extends to loans, guarantees and charges granted to directors and to persons connected to directors. It also applies to loans etc., by the company’s holding company.

The statutory restrictions are in addition to restrictions that might apply under ordinary principles of negligence and fiduciary duties. A director owes fiduciary duties and duties of care to the company.  Loans, guarantees and charges for the benefit of directors will commonly constitute a breach of these duties.The directors may not act in good faith for the benefit of the company in some such cases

The sanctions for breach of such duties are weak. There may be limited practical possibility that the sanctions are enforced, given that protracted and potentially expensive civil proceedings would be required.


Background II

Because of the potential misuse by directors of their companies as personal “piggy banks”, the Companies Act, 1990 placed strict limits on to the extent to which a company and its holding company might make loans to, enter credit transactions or give securities or guarantees for the benefit of, directors and persons connected to them.  The prohibitions and restrictions were re-enacted with modifications by the 2014 Act.

The legislation is in wide-ranging terms and prohibits transactions which would not necessarily be a breach of fiduciary or other duties.  It may prohibit transactions which are for the benefit of the company and/or in its interests. The legislation has both civil and criminal consequences

Because the prohibition extends to loans to companies controlled by directors or to other connected persons, the issue commonly arises in the case of secured lending to group or affiliated non-group companies, which are under common control.


Scope

The prohibition extends to include so-called “credit transactions”. They are defined to include hire purchase; leasing agreements and arrangements equivalent to credit or loans. They also include payments equivalent to loans, such as certain reimbursements of expenses.

Loans, guarantees and security, are also prohibited where they are made for the benefit of directors and certain persons “connected” to a director.  Connected persons include immediate family members, companies controlled by them, trusts of which they are beneficiaries and their partners.

A company is deemed connected to a director if it is controlled by him. For this purpose, it is controlled, if directors and connected persons (family members and other associates, etc.) together control half the share capital, voting rights or have the power to appoint the directors of the company.  In this case, the director is deemed to control the company and is thereby connected.

The prohibition covers shadow directors and de facto directors. A de facto director is a person who acts as a director, although he has not been formally appointed.  A person is a shadow director if a company is accustomed to act in accordance with his instructions.

The prohibition covers the assumption of liabilities on existing transactions which would if they had they been entered by the company, have breached the above prohibitions.  The company may take part in an arrangement whereby someone else makes a loan or other equivalent benefit to the director.


Substantive Restrictions I

Except to the extent permitted below, a company shall not

  • make a loan or a quasi-loan to a director of a company or of its holding company or to a person connected with such a director;
  • enter into a credit transaction as a creditor for such director or a person so connected;
  • enter into a guarantee or provide security in connection with a loan, quasi-loan or credit transaction made by any other party for such a director or a person connected with a director.

A company shall not arrange for the assignment or assumption of rights and obligations under a transaction which would have contravened the above provision, had it been entered by the company.

A company shall not take part in any arrangement under which another person enters into a transaction which, if it had been entered into by the company, would have contravened the above provisions where that other person, in pursuance of an arrangement, has obtained or is to obtain any benefit from the company or its holding company or a subsidiary of the company.


Substantive Restrictions II

The prohibition extends to quasi-loans, credit transactions and guarantees.  It also covers the provision of security in connection with any of them.  A quasi-loan is a transaction, by which one person pays or agrees to pay a sum to another, or reimburses or agrees to reimburse expenditure where the arrangement is in substance a credit transaction by the former to the latter.

Credit transactions cover a wider range of transactions than bare loans.   Security includes the full range of security over any and all classes of assets.

A lease or hire purchase agreement by the company to a director or a connected person is within the prohibition. A lease of land, reserving a rent of less than €100 (effectively a nominal rent, usually a long lease/sale) granted in return for a premium or capital sum, representing the open market, is deemed not a credit transaction for this purpose.


Connected Person

Connected persons include spouses, siblings, parents and children of the director. They include companies controlled by the director. They include any trustees of a trust of which the director or any of his spouse or children or any company which he controls, is the beneficiary.  It includes a partner. These parties are not connected if they are also directors of the company.

A company or other body corporate is deemed to be controlled by a director if he together with the above classes of (connected) persons owns or controls more than half of the equity share capital or voting power of the company.

A person is connected with a director of a company if, but only if, the person (not being himself a director of the company) is—

  • that director’s spouse, civil partner, parent, brother, sister or child;
  • a person acting in his or her capacity as the trustee of any trust, the principal beneficiaries of which are that director, the spouse (or civil partner) or any children of that director or anybody corporate which that director controls; or
  • in partnership with that director.

A child, in relation to a director, is deemed to include a child of the director’s spouse or civil partner who is ordinarily resident with the director and the spouse/ civil partner.


Connected Corporate

A company (or another body corporate) is connected with a director of a company if it is controlled by that director or by another body corporate that is controlled by that director. A director of a company controls a body corporate if, but only if, he, alone or together with any other director or directors of the company or any person connected with the director or such other director or directors, is

  • interested in one-half or more of the equity share capital of that body; or
  • entitled to exercise or control the exercise of one-half or more of the voting power at any general meeting of that body; the control may be through other corporates which the director controls;

It is presumed until the contrary is shown, that the sole member of a single-member company is a person connected with a director of that company.


Consequences of Breach

Unless an exemption is available, the company may avoid the transaction.  The persons benefiting must indemnify the company.

Any transaction that is in contravention of the prohibition is voidable and can thereby be set aside at the instance of the company, unless

  • restitution of any money, the subject matter of the arrangement is no longer possible;
  • the company has been indemnified for the loss concerned otherwise;
  • any rights acquired bona fide for value and without notice of the contravention by any person other than a person for whom the transaction was made would be affected.

A company entering a transaction in contravention of the above provision (in respect of loans, quasi-loans), for the benefit of directors, etc.  and any officer in default, is guilty of a category 2 offence. An officer is in default if he authorises, or in breach of his duty as such officer, permits the default concerned.   A default includes a refusal to do a thing or the contravention of a provision.


Personal Liability

If a company is being wound up and is unable to pay its debts, and the court considers that any of the above arrangements (including those below the 10% threshold) has contributed materially to the company’s inability to pay its debts or has substantially impeded the orderly winding up of the company, then the court may, on the application of the liquidator, creditor or another member of the company, if it thinks proper may make the below declaration.

The declaration is that any person for whose benefit the arrangement was made, shall be personally liable, without limitation of liability, for all or such part as may be specified by the court, of the debts and other liabilities of the company.

In deciding whether to make a declaration, the court shall have particular regard to whether and to what extent, any outstanding liabilities arising under the arrangement were discharged prior to the commencement of the winding up.  In deciding the extent of any personal liability, the court shall have particular regard to the extent to which the arrangement in question materially contributed to the company’s inability to pay its debts or substantially impeded the orderly winding up of the company.


Presumption in Proceedings

In proceedings concerning directors, where it is proved that the defendant was aware of the basic facts concerning the default, it shall be presumed that the defendant permitted the default, unless he shows that he or she took all reasonable steps to prevent it or that by reason of circumstances beyond his control, he was unable to do so.  This presumption is not limited to the prohibition on loans, credit, etc., but is highly relevant in this context.

The basic facts mean such of the facts relating to one or more acts or omissions which constituted the default as can reasonably be regarded as indicating at the relevant time, the general character of those acts or omissions.

“Permitted” in relation to the default, means permitted in breach of the defendant’s duty as an officer of the company.  “Proceedings” in this context mean proceedings for an offence which under the Act, which provides that a company in default shall be guilty of an offence.


References and Sources

Primary References

 

Companies Act 2014 S.239 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)  Ch.17   Courtney

Keane on Company Law 5th Ed. (2016) Ch. 27 Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Palmer’s Company Law