Loan Exemptions

Overview of Exemptions I

Loans, guarantees and security granted by a company to or for the benefit of a director or a to person or company connected to him, are very strictly regulated. Generally, such loans, guarantees and security are prohibited and are void. They also constitute a criminal offence.

There are various exceptions to the general prohibition. Some exemptions apply only to certain classes of prohibition.

There is an exemption for transactions between companies in a group (e.g. a loan by a company to its holding company,  a subsidiary or a sister company). These companies might be otherwise deemed connected to directors or under their control and be thereby prohibited.

The general prohibition does not prohibit a company from entering an arrangement with a director or connected persons etc., if the value of the arrangement, and where other arrangements have been entered, the total value of all such arrangements is less than 10% of the company’s relevant assets.


Overview of Exemptions II

The summary approval mechanism allows for the validation of transactions which would otherwise be prohibited or restricted.  The procedure is available to private limited companies. The procedure requires that the directors make a declaration regarding the solvency of the company. The transaction must be first approved by the members by a special resolution.

There is an exception for the reimbursement or advancement of reasonable expenses. The liability must be discharged within six months by the director.  Failure to do so constitutes an offence.

A company which is a bank or other regulated lender may advance loans to directors, provided that they must not be in value and in terms, any more favourable than it would offer to a person of similar standing, who is unconnected.

There are various other exemptions.


Group Exemption I

Where companies are under common control but are not within a group, the prohibition may prohibit inter-company loans, guarantees, and security, because there are common directors, so that one or both companies is connected with a director.  Sometimes holding company and subsidiaries within the meaning of the Companies Act, are created artificially, by providing a so-called golden share (creating sufficient rights of control) so as to facilitate inter-company loans, securities, and guarantees.

There is an exemption for transactions between companies in a group. The group exemption applies to loans, quasi-loans, guarantees and security transactions for the benefit of a group embers. The definition of a holding company and subsidiary in the Companies Act applies. A holding company and its subsidiaries (down to a certain level) constitute a group for this purpose. This is narrower than what might constitute a group in other contexts.


Group Exemption II

The general prohibition does not prohibit a company from making a loan or quasi-loan to a body corporate which is its holding company, subsidiary or a subsidiary of its holding company.  It does not prohibit a guarantee or the provision of security in connection with a loan or quasi-loan made by any person to a body corporate which is its holding company, subsidiary or a subsidiary of its holding company.

The general prohibition does not prohibit a company from entering a credit transaction as a creditor for any body corporate which is its holding company, subsidiary or a subsidiary of its holding company.  It does not prohibit entering into a guarantee or providing any security in connection with a credit transaction made by any other person for any body corporate which is its holding company, subsidiary or a subsidiary of its holding company.


Transactions below Value

The general prohibition does not prohibit a company from entering an arrangement with a director or connected persons etc., if the value of the arrangement, and where other arrangements have been entered, the total value of all such arrangements, is less than 10% of the value of the company’s relevant assets. The relevant assets of a company are its net assets determined under its most recent financial statements.

A company enters an arrangement with a person if it  makes a loan or quasi-loan to or enters a credit transaction as a creditor for that person; or  enters a guarantee or provides any security in connection with a loan, quasi-loan or credit transaction made for that person or by any other person;

Where the arrangement comes to exceed 10% of the relevant assets for any reason such as by a fall in the value of the assets, it is the duty of the company and its directors and any other persons, who are aware or ought reasonably to be aware of the same, to amend the terms of the arrangements so that the total amount is within the relevant percentage limit.

This must be done within two months of when the directors become aware or ought reasonably to become aware of the situation. Where the terms of the arrangements are not amended within the relevant period, the arrangements are voidable at the instance of the company.


Summary Approval Procedure

The general prohibition does not prohibit a private limited company (an LTD) from making a loan or quasi-loan, entering a credit transaction or entering into a guarantee or providing any security etc. to a director or to a person connected to a director, if the summary approval procedure is followed in relation to the doing of that particular act.  The summary approval procedure is not available to a company which has a restricted person as a director.

The summary approval procedure requires a declaration that the company is able to discharge its debts in full as they become due, together with a special resolution or unanimous resolution of the members passed within the previous 12 months.  An auditor’s report is no longer required.

If the resolution approving the transaction was not unanimous or was not approved by at least 90 percent of the shareholders, the transaction may not be undertaken for 30 days after the special resolution.  During this time, the dissenting minority may apply to the court, to cancel the special resolution.  The transaction may be suspended pending the court order.


SAP Director’s Resolution

A declaration is required to be given by the directors at a meeting held within 30 days prior to the meeting of the shareholders to pass the special resolution, approving the transaction or arrangement. It must be made by the directors or the sole director in the case of a limited company with the sole director.  Where there are more than two directors, a majority suffices.

A copy of the declaration must be filed with the Companies Registration Office (CRO) within 21 days of the relevant date.  On application, the High Court may declare the activity valid notwithstanding the failure to file the declaration, where this is satisfied that it would be just and equitable to do so.

A director who makes a declaration without reasonable grounds for his opinion that the company is solvent may be declared personally liable without limitation for all the debts and liabilities of the company. The application to have the director declared personally liable may be made by a liquidator, creditor or shareholder.  In the case of a successor, it may be made by the officers of that entity.  It may be made by the ODCE.

Where the company is wound up within 12 months, it is presumed that the director did not have reasonable grounds for making the declaration.


Miscellaneous Exceptions

The general prohibition does not prohibit a company from doing anything to provide any of its directors with funds to meet vouched expenses properly incurred for the purpose of the company, or for the purpose of enabling him to properly perform his or her duties as an officer of the company, or to enable any of its directors to avoid such expenditure. Where a company enters into a transaction so permitted, liability falling on any person arising from the transaction must be discharged within six months of the date on which it was incurred.  Contravention is a category 4 offence.

The general prohibition does not prohibit a company from making a loan, quasi-loan, entering a credit transaction, entering a guarantee or providing security, provided that the following conditions are satisfied.

  • the transaction must be entered in the ordinary course of the company’s business (e.g. a bank);
  • the value of the transaction must not be greater, and the terms on which it is entered must not be more favourable, in respect of the person for whom the transaction is made, than the company ordinarily offers; and
  • which it must not be unreasonable to expect that the company would offer to or in respect of a person of the same financial standing as that person, but unconnected with the company.

Pre-2014 Act Whitewash Procedure I

Prior to the 2014 Act, companies could give guarantees, security or credit transactions, which would otherwise breach the above prohibition, under a “whitewash” procedure. It required an authorisation by a special resolution given within the previous 12 months. The directors were required to make a declaration in advance, to the effect that the company would be solvent, notwithstanding the giving of the guarantee, security, etc.

The director’s declaration was required to be made at a directors’ meeting held no earlier than 24 days before the members’ meeting. It was required to be made by a majority of directors. It was required to state, that having made a full enquiry, that the company would be able to pay its debts as they fell due, notwithstanding the guarantee, security, etc.


Pre-2014 Act Whitewash Procedure II

If the transaction was not unanimously approved, the company was required to wait 30 days before entering the transaction. Within this time, an application could be made to the court by dissenting shareholders holding not less than 10% of the share capital of the company. The court could set aside the approval.

Persons qualified to be the company’s auditors were required to give an opinion that the directors’ declaration was reasonably given. In practice, many accountants were not willing to give the requisite confirmation, because of the risk of liability to creditors. The requirement for the auditor’s opinion does not now apply in this context, under the summary approval procedure.


References and Sources

Primary References

 

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)     Courtney

Keane on Company Law 5th Ed. (2016) 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