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Company directors should be aware that it is not permissible under the Companies Act 2014 to advance loans from a company to its directors, with a number of important consequences to be borne in mind.
Section 239 of the Companies Act prohibits loans or quasi loans from a company to its directors or persons connected with a director. This includes loans to a company controlled by the director where the company is not part of the same group as the company advancing the loan.
Relevant Exemptions
There are a number of exemptions including where the value of the loan does not exceed 10% of the Company’s assets or where the arrangement is a reimbursement of director’s expenses. There is also an exemption for inter-group loans.
Summary Approval Procedure
The Company can also avail of a summary approval procedure (“SAP”) under the Act to authorise the otherwise restricted activity. This involves the making of a declaration by the directors or a majority of directors that the Company is not insolvent and that it is not unreasonable for the directors to make this declaration. A summary approval of the prohibited transaction cannot be used retrospectively and must be filed in the Companies Registration Office within 21 days.
Category 2 Offence
Directors who take a loan from the Company in contravention of section 239 shall be guilty of a category 2 offence. It is worth noting that statutory auditors have an obligation to notify the Corporate Enforcement Authority (“CEA”), where in the carrying out of a company’s audit, they come across information that leads them to believe that officers may have committed a category 1 or 2 offence under the Act. This means that if they become aware that a company has advanced a loan to a director, because this is a category 2 offence, the auditors are obliged to report it to the CEA.
What should Directors do?
Directors should take legal and financial advice prior to taking any loan from a company. The purpose of section 239 is to protect creditors. If directors use the SAP prior to taking a loan, the otherwise prohibited activity may be authorised under the law provided the directors, having made a full enquiry into the affairs of the company can make a declaration that the company is not insolvent and will not be wound up within 12 months of advancing the loan.
Potential Personal Liability
The use of SAP potentially exposes directors to personal liability for the debts of a company, therefore careful advice is required and to ensure the proper timelines for filing are met. A company’s financial advisors can also examine the assets of the company to ascertain if the loan is less than 10% of the company’s assets or whether any other exemptions might apply.
Conclusion
Given that a breach of Section 239 of the Companies Act results in a category 2 offence for directors and failing to report can result in a category 3 offence for auditors under Section 393 of the Act, the issuing of loans is a matter that requires directors’ due attention to its consequences.
Further Information
For further guidance on the implications for company directors or for any ancillary advice, please contact Gríana O’Kelly, Head of Corporate & M&A and Commercial Contracts.