In-depth exam style question structure on Loans to directors. The structure breaks down all the relevant information and provides a step-by-step application.
Loans, quasi-loans and credit-transactions to directors (and others):
The general rule under s197 is that a company cannot:
Make a loan to:
o a director of the company or a director of its holding company
o a connected person (see below) and the company both individuals are connected to is a public company a
company associated to a public company (eg a private company is a subsidiary of a public company)
Give a guarantee or security in connection to a loan made by an individual to a director/ connected person…
…Unless there is approval given by shareholder via an ordinary resolution – s197(1).
Quasi-loans and credit transactions:
There are also restrictions on ‘quasi-loans’ and ‘credit transaction’ being made to directors or to a connected person of a
public company or a company associated with a public company which also require shareholder approval (s198 & s201)
Quasi-loan company meets some financial obligation on behalf of the director with the understanding that the director will
reimburse the company.
Credit transaction arises when the company provides the director with goods/service and the director pays the company
back for these in instalments.
Connected person to a director:
Spouse / CP / children / director’s parents – s253(2)
Any company in which the director and a connected person hold 20% or more combined together (a body corporate) s253(2)
(b)
Who is the loan going to? Who is it between? Is it a loan, quasi-loan or credit transaction?
Exceptions for needing approval:
There are some exceptions for when loans, quasi-loans and credit transaction do not require shareholder approval.
Just state what is applicable but point out there are a number of exceptions to needing approval…
1. Loans and quasi-loans up to 10,000 s207(1) - (when they exceed 10,000, they need approval)
2. Credit transactions up to 15,000 s207(2) – (when they exceed 15,000, they need approval.
3. Loans, quasi-loans or credit transactions up to 50,000 for the directors or other person’s expenditure for the
company’s business – s204.
4. Loans, quasi-loans or credit transactions for a director in defending a civil claim (breach of duty/negligence…) or for
criminal proceedings or for investigations by regulatory authorities – s206.
5. Loans, quasi-loans or credit transactions made between certain group companies – s208.
6. The loan does not exceed 10,000
7. The guarantee does not exceed 15,000…
Procedure/requirements before approval is given:
There are also conditions to meet to gain approval
That approval must be given before the transaction is entered into.
Before approval:
Under s197(3) a memorandum must be created which states the nature of the transaction including –
o The amount
o Its purpose
o Extent of the company’s liability in connection with the loan
It must be available at the company’s registered office for 15 days before the GM is held for shareholders to inspect –
or, if the approval will be sought via a WR then a copy of the memorandum will be circulated with the resolution –
s197(3)(a)
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