When Can I Take a Loan From my Company?

Since the Companies Act 2014 more options were introduced for  Directors taking loans from their companies. 

A frequent question we receive from clients is around the ability of Directors to take loans from their companies. In general, the rules of the 2014 Act set out that loans, quasi-loans, or other arrangements, such as entering a transaction as a creditor on behalf of the director of the company or of its holding company or providing guarantees or any other security in connection with a loan, quasi-loan or credit transactions, are prohibited to directors or parties connected to directors except under the following five circumstances. 

The 10% exemption 

The reference to the company’s Relevant assets in the 10% exemption is where a company makes a loan to a director or party connected to a director.  These are the company's net assets as determined by its latest statutory financial statements as laid before its AGM – often the prior year financial year end accounts.  So, it is a case of looking at the net asset value of the company in its last audited or unaudited year-end financial statements. In circumstances where the company's net assets fall, and by virtue of this the arrangement with the director, the loan comes to represent more than 10% of the company's net assets, then the company and the director, or other parties involved, must take reasonable steps to reduce the balances outstanding such that they are less than 10% once more.  They must do so within two months after the date of becoming aware or ought reasonably to have become aware of the situation.  Thus, the Directors must continue to monitor the situation and where the company value impairs e.g., due to subsequent losses then the Director may breach the exemption after taking the loan. The frequent question in this instance is, at what point should the director or the company be reasonably aware of such a situation? The Act provides no guidance as to what is reasonable in these circumstances. However, where a company has ongoing management accounts it should be able to flag instances where it is coming close to the exemption. Where the directors fail to take reasonable steps to rectify this situation within the prescribed timeframe, the Act provides that the arrangements shall be voidable at the instance of the company.   

Evidential requirements on loans by a company to its directors 

Part 5 of the Act sets out the various rules regarding evidencing loans made to directors, the basic principle is that if the terms of the loan are not set out clearly, then the loan is repayable on demand; and until such time as the loan is repaid, it has borne interest at the appropriate rate. It is worth noting that the usual tax provisions apply to loans to directors BIK and income tax will still have to be paid on their loans in the normal course of returns.  

Advances by a director to the company In some cases a Director may wish to loan monies to their company and Section 237 of Part 5 of the Act sets out the various rules regarding loans by directors (or connected persons) to the company or its holding company. Where the terms of any transaction or arrangement by a director to the company or the holding company are not set out clearly in writing or are ambiguous as to whether the arrangement constitutes a loan or quasi-loan, then it is presumed that the transaction constitutes neither a loan nor a quasi-loan and instead constitutes a gift or capital contribution.  Thus, it is important for these intentions to be clearly defined under agreement or board minute with the company. Where it is proved that the transaction does in fact constitute a loan but where the exact terms are ambiguous then under the provisions of the Act the actual nature or substance of the transaction or arrangement is presumed rather than being adequately formalised in writing. Therefore, depending on which terms are ambiguous the loan:

• may be deemed to bear no Interest
• may be presumed not to be secured; or
• is proved to be secured but the terms are ambiguous with regards to its priority, then it may be deemed to be subordinate to all other debts of the company.

This can obviously be very serious for the individual if they believed they had security for the loan as advanced to the company.  

Contact

Careful consideration is needed and consultation with the appropriate professional advisors should also be obtained (tax, accounting, or your legal advisors etc.,) prior to formalizing a loan to a director or person connected to a director. With our services you have a professional and dedicated service with local knowledge and international experience from a contactable team to assist your company. For an initial meeting or discussion, please contact us.

The content of this blog is intended to convey general information and educational advice. It should not be relied upon as professional advice. We have done our best to ensure that the information provided by Roberts Nathan is accurate and up-to-date but unintended errors or misprints may occur. If you wish to obtain business advice or taxation advice please do not hesitate to get in contact with a member of our team.