Company directors and practitioners will be familiar with the current restrictions on transactions between a company and its directors or persons connected to them. The existing provisions are maintained in the new Act, though happily companies will benefit from simplified procedures for the approval of such transactions.
Duties of company directors under the Act
However, company directors will need to be particularly aware of new duties imposed under the Act which will require loans both to and from the company to be properly documented. Simply put, loans between companies and directors or connected persons must be evidenced in writing in clear and unambiguous terms. Failure to do so will cause the transaction to be treated in an adverse manner from the director or connected person’s perspective. This will not only apply to loans made after the commencement of the Act, but also to loans which may already be in place.
In the case of loans to a director or connected person from the company, where the loan is not reduced to writing in clear terms, it will be presumed that it is repayable on demand and bears interest at an appropriate rate unless the director can prove otherwise.
Of particular significance to directors will be the treatment of undocumented loans from a director or connected person to the company. In that case, it will be presumed that it is not a loan and is not repayable. If the director can successfully prove that it is in fact a loan, there is a further presumption that the loan bears no interest, is unsecured and is subordinate to all other debts of the company.
Next steps for directors
In light of these new presumptions, it is clearly important for directors to put appropriate loan agreements in place in addition to recording transactions at board meetings. Taking simple steps to document these transactions will ensure that directors avoid potentially significant difficulties in the future.