Terms of Loans

Records of Loans

The Companies Act 2014 requires that loans and credit transactions between the company and directors must be evidenced in writing, in order to be enforceable.  The requirement applies to loans by directors to companies and loans by companies to directors. There are presumptions in each case, which are against the interests of the director and in the interests of the company.

Companies must keep records of loans and quasi-loans to directors of the company or of its holding company or persons connected with them. The requirement applies to such loans and credit transactions insofar as they are lawful at all.

The company must keep records of transactions or arrangements entered by a director or a connected person with the company or its holding company, which are or are claimed to constitute to a loan or a quasi-loan by the director (or connected person) to the company. If they are not so evidenced, their enforcement is impaired.

If a loan or a quasi-loan by a director or a connected person to the company is not documented at all, it is presumed to be a gift (neither a loan nor a quasi-loan). If it is a loan or a quasi-loan, it is presumed to be an unsecured, non-interest bearing loan, subordinated to all other creditors.


Loans to Directors I

The following applies to loans and quasi-loans made by a company to a director or to a person connected with a director. It also applies to loans and quasi-loans by group companies.  If the terms of the loan or quasi-loan are not written, it is presumed that it is to be repayable on demand and that interest at a rate of 5% per annum applies, unless another rate is specified by a Ministerial order.

The provision applies presumptions in civil proceedings. It will most commonly arise in liquidations. It facilitates the liquidator in recovering the loan monies.

The director or connected person may allege that the company has made a loan or quasi-loan to him. In civil proceedings in which it is claimed that a company has made a loan or quasi-loan to a director of the company, a director of its holding company or to any person connected with them, which is not in writing, then it is presumed until the contrary is proved

  • that the loan or quasi-loan is repayable on demand; and
  • that for any period before the payment, the amount of the loan or quasi-loan has borne interest at the appropriate rate.

Loans to Directors II

If there is an agreement in writing or partly in writing, its provisions will apply.  However, in the event of ambiguity, the statutory presumptions apply.

If any of the terms are ambiguous in relation to the time at which or the circumstances under which the loan is to be repaid, then it is presumed until the contrary is proved that it is repayable on demand.

If the terms are ambiguous in relation to the extent to which it bears interest, then it is presumed until the contrary is proved, that for any period before repayment of the loan or quasi-loan, it bears interest at the appropriate rate, which is specified by law. Terms are deemed ambiguous if the written terms do not make provision for the matter concerned and the provision made in respect of that matter is alleged not to be in writing.


Loans by Directors I

Equivalent provisions apply to loans by directors or connected persons to the company or to its holding company. Once again, the relevant presumptions operate in the company’s interests and against the director’s interests.

If the terms of a transaction or arrangement are not in writing or are in writing or partly in writing, but are ambiguous as to whether or not the transaction is a loan or quasi-loan or not, it is presumed until the contrary is proved, that the transaction or arrangement constitutes neither a loan nor a quasi-loan as the case may be.  It is accordingly assumed to be a transfer, gift or capital contribution.

Where the terms are not in writing or are in writing, are partly in writing or are unambiguous as to whether they constitute a loan or quasi-loan or not, or a quasi-loan as distinct from a loan, it is presumed until the contrary is shown, that the transaction constitutes neither a loan nor quasi-loan as the case might be.  Accordingly, it is presumed to be a contribution of capital.


Loans by Directors II

In proceedings, where it is proved that a loan or quasi-loan was made to the company or its holding company by a director or a person connected with him, whether the terms have been reduced to writing, wholly or in part or are wholly oral, then if there is ambiguity in relation to whether the loan bears interest, it is presumed that it does not bear interest.

Where there is ambiguity as to whether the loan is secured, it is presumed that it is not secured. Where there is ambiguity with respect to the priority of security, it is presumed that it is subordinate to all other indebtedness of the company.  Each of the above presumptions applies separately.

If the written terms of the transaction or arrangement do not specify the nature of the transaction or arrangement or the nature of the transaction or arrangement is alleged to be specified by terms which are not in writing, then it is deemed ambiguous, and the above presumptions apply.

Equally, where they are ambiguous as to interest, being secured, etc., they are deemed ambiguous where the written terms of the loan do not make provision or the provision in relation to the matter is alleged to have been made otherwise than in writing.


Presumptions; Loans to Director I

It is presumed that in the absence of evidence to the contrary, that a loan or quasi-loan by the company to the director is repayable on demand and bears interest at a specified rate.  In the latter case, it is presumed, unless the contrary is shown,

  • that the transaction or arrangement is neither a loan nor a quasi-loan but is a gift/ contribution to the relevant company;
  • that if it is a loan, it does not bear interest;
  • that if it is a loan or quasi-loan, it is not secured; and
  • that if it is a loan or quasi-loan, that it is subordinated to all other creditors.

The provisions apply to loans and quasi-loans to

  • a director of the company;
  • a director of its holding company; or
  • a person connected with a director of any such company.

Presumptions; Loans to Director II

In proceedings, if the terms of the loan or quasi-loan are not in writing then it is presumed, until the contrary is proved, that the loan or quasi-loan is repayable on demand, and for any period before repayment of the amount of the loan or quasi-loan (or for any period before repayment of part of that amount) the amount or part has borne interest at the appropriate rate.

If the terms of the loan or quasi-loan are in writing or partially in writing but those terms are ambiguous with respect to the time at which or the circumstances under which, the loan or quasi-loan is to be repaid, then it is presumed, until the contrary is proved, that the loan or quasi-loan is repayable on demand.

If the terms are ambiguous with respect to whether, or the extent to which, the loan or quasi-loan bears interest, then it shall be presumed, until the contrary is proved, that for any period before repayment of the amount of the loan or quasi-loan (or for any period before repayment of part of that amount), that the amount or part has borne interest at the appropriate rate.


Presumptions; No Loan by Director I

Where an advance is shown to be a loan by the director to the company, whether in writing or partly in writing, then, in case it is in terms that are ambiguous in relation to whether or not it bears interests, it is presumed that the loan bears no interest.  Where there is ambiguity as to whether it is secured, it is presumed that it is not secured. If it is proved to be secured and it is ambiguous in relation to the priority that the security has, as against other indebtedness, it is presumed until the contrary is proved, that it is subordinated to all other indebtedness of the company.

In proceedings, if the terms of the transaction or arrangement concerned either—

  • are not in writing, or
  • are in writing, or partially in writing, but are ambiguous as to whether the transaction or arrangement constitutes a loan or quasi-loan or not (or as to whether it constitutes a quasi-loan as distinct from a loan),

then it shall be presumed until the contrary is proved, that the transaction or arrangement constitutes neither a loan nor a quasi-loan to the company or its holding company, as the case may be.


Presumptions; No Loan by Director II

A  transaction or arrangement is deemed  ambiguous as to whether it constitutes a loan or quasi-loan or not (or whether it constitutes a quasi-loan as distinct from a loan) , if the terms of the transaction or arrangement are partially in writing, and  the written terms of the transaction or arrangement do not specify what the nature of the transaction or arrangement is, and  the nature of the transaction or arrangement is alleged to be specified by those of its terms that are not in writing.

The circumstances in which the terms of a loan or quasi-loan are ambiguous with respect to a matter include, where

  • the written terms of the loan or quasi-loan do not make provision in respect of the matter concerned, and
  • a provision in respect of that matter is alleged to be made by those of the terms of the loan or quasi-loan that are not in writing.

Presumption; Terms of Loan

Where it is claimed that a transaction or arrangement entered into, or alleged to have been entered into by a director of a company with the company or its holding company, or by a person connected with such director with that company or its holding company (the “related person”), constitutes a loan or quasi-loan by the director or (as appropriate) the related person, the following provisions apply.

Where it is proved that a loan or a quasi-loan was made to the company or its holding company by the director of the first-mentioned company or the related person (whether the terms of the loan or quasi-loan are in writing, partially in writing or wholly oral) then, if—

  • those terms are ambiguous with respect to whether, or the extent to which, the loan or quasi-loan bears interest, it shall be presumed, until the contrary is proved, that the loan or quasi-loan bears no interest,
  • those terms are ambiguous with respect to whether, or the extent to which, the loan or quasi-loan is secured, it shall be presumed, until the contrary is proved, that the loan or quasi-loan is not secured, or
  • in the event that the loan or quasi-loan is proved to be secured and the case is one in which those terms are ambiguous with respect to the priority that the security concerned is to have as against other indebtedness of the company, it shall be presumed, until the contrary is proved, that the loan or quasi-loan is subordinate to all other indebtedness of the company.

The terms of a loan or quasi-loan being ambiguous with respect to a matter shall, if the terms of the loan or quasi-loan are partially in writing, include where the written terms of the loan or quasi-loan do not make provision in respect of the matter concerned, and provision in respect of that matter is alleged to be made by those of the terms of the loan or quasi-loan that are not in writing.

 


References and Sources

Primary References

 

Companies Act 2014 S. 236- S.237 (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