Under the Companies Act 2016, a general prohibition exists where companies are typically restricted from extending loans to their directors or related companies, as well as providing guarantees or security for loans taken by directors from external parties, including the concept of loan to director (subsection 224(1)). Nevertheless, it’s vital to note that exceptions to this rule do exist.
Exemptions for Exempt Private Companies
Exempt private companies can extend loans to directors, and companies can provide loans to directors for company-related expenses or when the directors are full-time employees or for purchasing homes [subsection 224(2)(b) and (c)].
Member Approval Required
Before granting such loans, the company must disclose the purpose and amount to the members, who must then approve them [subsection 224(3)].
Repayment Periods
In cases where there is no member approval (applicable to public companies), the loan must be repaid or the security discharged within six months from the conclusion of the company’s AGM [subsection 224(5)(a)]. For private companies, this period is extended to 12 months from the provision of the loan or security [subsection 224(5)(b)].
Staff Loans and Indemnity
Companies can provide staff loans to directors if the company’s members have approved a scheme for employee loans at a general meeting. Directors who authorize loans or security not compliant with the act may be personally liable under subsection 224(10), which can result in imprisonment or fines. If members do not approve a loan for director duties or home purchases, the directors who authorized the loan must jointly and severally indemnify the company for any losses [subsection 224(6)].