Under the Companies Act 1985 (the “1985 Act”) all companies were prohibited from making loans to their own directors, directors of their holding companies or persons connected with such directors.
There were a number of exemptions to the general prohibition (including loans that do not exceed £5,000, loans for expenditure on company business not exceeding £20,000 and loans for expenditure in connection with defending civil or criminal proceedings or in connection with regulatory action or investigation). However, where one of the exemptions was not available the loan could not be made and a breach of the rules was a serious matter, giving rise to both civil and criminal penalties.
The Companies Act 2006 (the “2006 Act”) (the final provisions of which were implemented on 1 October 2009) was heralded by the government as a piece of legislation that would simplify company law, particularly in relation to small companies. One of the simplifications came into force earlier in the life of the 2006 Act, in October 2007, and relates to loans to directors.
Under the 2006 Act the general prohibition on making loans to directors was removed and all companies are now permitted to make loans to their own directors or to directors of their holding companies, provided that shareholder approval is obtained. Where the director in question is a director of the company’s holding company the members of the holding company must also approve the transaction.
As with the 1985 Act, there are also a number of exceptions to the general rule and, where one of those exceptions applies, shareholder consent does not need to be sought.
The exceptions include:
- Loans of small amounts - the threshold has been increased from £5,000 under the 1985 Act to £10,000 under the 2006 Act and shareholder consent is only required for loans above £10,000.
- Expenditure on company business – the threshold has been increased from £20,000 under the 1985 Act to £50,000 under the 2006 Act.
- Expenditure in defending proceedings – shareholder consent is not required for loans made to directors for the purpose of defending any criminal or civil proceedings in connection with any alleged negligence, default, breach of duty or breach of trust by him or her in relation to the company or an associated company.
- Expenditure in connection with regulatory action or investigation – shareholder consent is not required in relation to loans to directors to provide him or her with funds to meet expenditure incurred or to be incurred in defending himself or herself in an investigation by a regulatory authority, or against action proposed to be taken by a regulatory authority, in connection with any alleged negligence, default, breach of duty or breach of trust by him or her in relation to the company or an associated company.
Private companies are also now permitted to make loans to persons connected with their directors or to the directors of their holding companies without the need for shareholder approval.
As mentioned above, if shareholder approval is required but is not obtained there are civil consequences only. All criminal penalties have been removed by the 2006 Act.