New company loan rules

Company secretaries need to make company directors aware of new rules regarding the taking of loans from companies – these rules are part of some significant changes being made within the Companies Act 2014, that becomes law in June 2015.
For example directors need to know that the terms of any such transactions need to be approved in writing. The details need to include the repayment schedule, whether the loan bears interest, if the loan is secured and what the priority of the security is. The object seems to be to avoid any fudging around the purpose of such loans.

Just some of the important changes in the Act include

• New evidential procedures are required for loans to or from directors and connected persons
• The summary approval procedure may be used to approve loans in excess of 10% of the relevant assets and does not require an auditor’s sign off
• Any person who benefits from a loan, quasi loan, credit transaction, guarantee or security, will be personally liable without limit for the debts of a company being wound up

The ‘Connected Persons’ net has widened

• The definition of connected persons has been expanded to include the civil partner and/or the child of a civil partner of a director.
• Where there are civil proceedings in which it is claimed that a company has made a loan or quasi-loan to a director or connected person and the terms of the loan or quasi-loan are not in writing or are ambiguous to repayment terms or whether it bears interest, then it shall be presumed that;
  a) the loan or quasi-loan is repayable on demand, and
  b) For any period before repayment of the amount of the loan or quasi-loan the amount or part has borne interest at the appropriate rate.

Personal Liability for company debts 
If a company is being wound up and is unable to pay its debts, and a court considers that any arrangement of a kind described in section 240(2)(a) has contributed materially to the company’s inability to pay its debts or has substantially impeded the orderly winding up of it, the court, may make a declaration that any person for whose benefit the arrangement was made shall be personally liable, without any limitation of liability, for all or such part as may be specified by the court, of the debts and other liabilities of the company.

This is part of a more detailed article by Conor Sweeney, of CLS Chartered Secretaries and an ICSA Council member, to be published in the ACCA’s AB Magazine’s March 2015 edition.