Complying With Company Law When Giving Loans to Directors

May 13, 2022 By admin 0

A common issue among companies is the giving of loans between companies and to Directors. However, there are company law rules governing the provision of loans and companies need to ensure they are compliant with the law. In Ireland, the majority of Private Limited Companies are owned by two or three shareholders. If these companies want to expand, they usually set up a new company using the same shareholders. These companies are referred to as being in a “group” as they have the same shareholders in each Company. However, Company Law has a different definition of what constitutes a group.

Definition of a Group

Section 155 of Companies Act, 1963, defines a group as two companies, one being the holding company and the other being a subsidiary. To be in a group, the holding company must:

(1) hold more than 50% of the nominal equity share capital, or

(2) hold more than 50% of the voting rights, or

(3) is a member and controls the composition of the board of the subsidiary company.

The majority of companies in Ireland are owed by 2 shareholders or “husband and wife” companies and if they are the only shareholders in each of the “group” companies, the companies are not in a group as defined by the Companies Acts.

One of the key benefits of companies being in a Group as defined by the Companies Acts is that you can avail of the Group exception under the regulations regarding loans between companies.

Sec 31 Companies Act, 1990

Section 31 of Companies Acts, 1990 prohibits companies from entering into certain types of transactions, which would be otherwise be lawful, for the benefit of a director or a party connected with a director. The legislation was introduced to prevent the controllers of companies abusing their positions of power by diverting company assets to themselves, whether directly or indirectly. A company may not:

 

  1. Make a loan, quasi loan, or guarantee to a director of the company or of its holding company or to a person connected with such a director.
  2. Enter into a credit transaction as creditor for such a director or a person so connected
  3. Enter into a guarantee or grant security in connection with a loan, quasi-loan or credit transaction to any other person for such a director or a person so connected

Connected Persons

 

Section 26 Companies Act, 1990 defines a connected artiklar om företag person as, a person is connected with a director if a company if he or she is a near relative of the director, is in business partnership with the director, acts as a trustee for a trust, near relatives, any body corporate which the director controls. A Director of a company shall be deemed to control a body corporate where he or she either alone or together with any other director or directors of the company or any persons connected with the director or such other directors, are interested in 50% or more of the equity share capital of that body or are entitled to exercise or control the exercise of 50% or more of the voting power at any general meeting of that body. Shadow Directors and sole members are also considered as connected persons.

Persons who are Directors and connected persons

 

  • Directors of a Co.
  • Shadow Directors of a Co.
  • Directors of a Holding Co.
  • Shadow Directors of a Hold Co.
  • The spouse, parent, brother, sister, Child of a Director of a Co. or Hold Co.
  • The partner of a Director of a company or its Hold Co.
  • Trustees where the principal beneficiaries of the trust are a Director, his spouse, any of his children or any body corporate he controls
  • A body corporate controlled by a director of a Co. or of its Hold Co.
  • A body corporate controlled by a body corporate that is itself controlled by a Director of a Co. or its hold Co.
  • The sole member of a single-member private limited company

Exceptions

 

In order for companies not to breach the regulations in relation to the loans, there are a number of exceptions that a company can avail of. They are as follows:

 

  • The loan is under 10% of the relevant assets,
  • The directors follow a statutory validation procedure,
  • The Group exception,
  • The transaction is a valid Directors expense,
  • The transaction is a normal business transaction.

Golden Share

 

The Group exception is the most commonly used exception. It has been outlined above what defines a group. The purpose of the “golden share” is to give the holder of the golden share the power to control the board of the subsidiary company and thus the companies will then be in a group pursuant to the definition in the Companies Acts. The “Golden Share” is typically an “A” Ordinary Share with the rights to control the composition of the board. This structure allows companies to loan money between companies without being in breach of the legislation. A downside to putting all your companies into a group is the companies will be unable to claim the exemption from having your accounts audited.

In order to put a golden share in place, the company issuing the golden share is required pass special resolutions to set up the new share class and to amend their Memorandum and Articles of Association inserting the new share class and the rights attached to the golden share.