There are new provisions on evidential requirements for loans to and from directors, some small changes to the regime on substantial transactions with directors and some substantial changes to the regime on the making of loans to directors.
Loans to and from directors - evidential requirements
Section 236(2) of the Act provides that if a company makes a loan to a director of the company, its holding company or to a person connected with such director and the terms are not in writing there is a rebuttable presumption that (a) the loan is repayable on demand and (b) is interest-bearing at the ''appropriate rate”. “Appropriate rate” is defined as 5% or such other rate as may be specified by ministerial order (section 2 (7)). These terms are also presumed where the loan is in writing, but the terms of such loan are ambiguous.
The rationale behind this new provision is to remind directors and shareholders that the company is a separate legal entity and that the company’s funds are not the funds of the shareholders or directors. Although the presumption only applies in ''relevant proceedings” (which are civil proceedings in which it is claimed that such a loan is made), clients should be encouraged to document all new loans and, where possible, existing loans should also be put into writing.
Conversely, section 237 provides that where it is claimed that a loan has been made by a director (or connected person) to a company or its holding company, and where such loan is not in writing, there will be a rebuttable presumption that no such loan was made - the implication being that it was a gift or an advance. If it is shown or proven that a loan was in fact made to the company, then there will be a rebuttable presumption that the loan is interest free, unsecured and subordinated to all other debt of the company. Again, the same presumptions will apply if the loan is in writing, but its terms are ambiguous.
The rationale behind this provision may be obvious: where a company goes into insolvent liquidation with a loan or loans from directors, those directors will be creditors of the company and will rank pari passu with other creditors. It was felt that in some cases no such loans were made, or if advances were made, they were never intended to be repaid, hence the provision encouraging directors and companies to document such loans.
An anomaly appears to arise in the wording of Section 237(3) where subsections (a) and (b) provide for a presumption that where the terms are ambiguous, the loan is interest free and unsecured, but subsection (c) appears to only subordinate the loan once it is proved to be secured. It therefor appears that an unsecured loan would rank pari passu with the other debt of the company, but a secured loan would be subordinate to all other debt.
The lesson is that directors should ensure that all such loans are documented with terms set out clearly to avoid, having given loans to the company, being treated as unsecured creditors, or worse, not creditors at all. In each case, a simple form agreement can be put in place between the company and the director setting out the agreed terms with regard to repayment, interest, etc.
Substantial transactions in respect of non-cash assets
Section 29 of the Companies Act 1990 (1990 Act) introduced rules governing the entry by a company into substantial property transactions with directors and/or connected persons which, unless the arrangement was below a certain threshold or fell within certain exemptions, required shareholder approval. Section 238 of the Act essentially re-enacts the provisions of section 29 with two changes. Firstly, the de minimus threshold is raised, so that approval is only required where the value of the assets concerned exceeds €5,000 and, subject to that, exceeds €65,000 or 10% of the net assets of the company. Secondly the provisions of the section do not now apply to the disposal of assets by a receiver (section 238(4)(c)).
Restricted transactions
Section 239 of the Act sets out the general prohibition on a company making a loan or quasi-loan to, or entering into a credit transaction or guarantee or providing security for, a director or a person connected to a director. These provisions were previously contained in section 31 of the 1990 Act.
Sections 240 and 242-245 of the Act set out exceptions to the general prohibition as follows:
- The value of the arrangement is less than 10% of the company’s net assets. The scope of this exception has been widened in the Act. Previously, under section 32 of the 1990 Act, guarantees and the provision of security for a director were prohibited, irrespective of their value. Where the company’s net assets decrease and the arrangement comes to represent more than 10% of the company’s net assets, then the company and the director must take reasonable steps to reduce the balances outstanding to bring them below the 10% threshold.
- A Summary Approval Procedure (SAP) is carried out with regard to the prohibited arrangement. The SAP is a method provided for in the Act which validates otherwise prohibited transactions. In the case of transactions with directors prohibited by section 239, the SAP involves the making of a declaration by the directors of the company, containing certain information relating to the proposed transaction, and the passing of a special resolution of the members of the company approving the transaction. Significantly, the SAP does not require an auditors report. Section 34 of the 1990 Act also allowed for a white wash procedure, but that section also required a report from an independent expert auditor opining that the directors’ declaration was reasonable. Auditors were very reluctant to give such a report, indeed they were all but impossible to obtain, making the Section 34 white wash largely unworkable. The removal of this requirement is very welcome.
- The arrangement is with a member of the same group of companies. The provision refers to “any body corporate” so that it now clearly extends to any holding company, subsidiary or sister company, whether incorporated in Ireland or elsewhere.
- The arrangement is a reimbursement of the director’s expenses - there is no change here from the provisions of the 1990 Act.
- The company enters into the transaction in the ordinary course of business and the value of the transaction is not greater nor the terms better than that which the company would offer ordinarily. This exemption has been expanded to include giving guarantees and providing security. Subsection 245 (2)(b)(ii) also provides that if it would not be unreasonable to expect the company to have offered such terms, the arrangement will be exempt from the prohibition. This is a change from the previous position which required the terms of the arrangement to be “reasonable” rather than “not unreasonable”, so in theory there is now less of an onus on the company availing of the exception.
Definitions
The definition of “connected person” has been expanded to include a child of a civil partner of a director who is ordinarily resident with the director and his or her civil partner. There is also a new presumption that the sole member of a single member company is connected with a director of that company. Finally, the concept of de facto director has been well established at common law and section 222 now gives express recognition to this.
Conclusion
To some extent the Act re-states the previous law regarding transactions between companies and directors and connected persons, but with some helpful improvements. In particular the ability to validate a restricted transaction using the SAP, without the requirement for an auditor’s report, is very useful.
*The Above Article Was Contained In The Winter 2015 Edition of The Parchment*
About the author
Shaun O'Shea
About Shaun
Shaun is a partner and head of our corporate, commercial & M&A group. Shaun works closely with Irish and international clients across a wide spectrum of industry sectors advising on the full range of business law issues that arise.