Avoiding Unlawful Transactions with Company Directors
This CPA Information Bulletin outlines the restrictions that the Companies Acts place on companies when entering into certain arrangements with company directors and addresses frequently asked questions.
As with all legal issues, it is advisable to speak to your professional adviser before proceeding. Taxation implications may also arise.
Can I borrow money from a company that I am a director of?
The Companies Acts do not allow a company to grant loans to directors or to enter into certain transactions with directors or persons connected with directors. The following transactions are prohibited;
Loans
Quasi loans
Credit transactions, where the company acts as a creditor
Guarantees or the provision of security in connection with a loan
What is a connected person?
For the purposes of this legislation, a person is connected to a director if they are a near relative (including spouse) or in a business partnership with the director. Another company controlled by the director is also considered to be a connected person.
Are there any exceptions to the prohibition?
There are a number of exceptions to this general prohibition. However, they should be researched and considered carefully before proceeding. One exception allowed by the Companies Acts is for loans totalling less than 10% of the company’s “relevant assets”. This is an aggregate figure and a company must consider the total of all loans/credit transactions made.
How do I know what the company’s “relevant assets” are?
A company’s “relevant assets” are
Total assets less total liabilities as per the most recent balance sheet to have been laid before an AGM.
Where no balance sheet has been laid before an AGM, the company’s called up share capital.
Loans made in the normal course of business
A loan to a director will not be considered to be prohibited where it is made in the normal course of business. The same terms would apply to any other individual. Generally, this exception will only be available to companies who make loans in the normal course of their business, e.g. financial institutions and banks.
What about loans between group companies?
A company can make a loan to another company provided that the company is its holding company, subsidiary or sister company. You will need to ensure that the companies in question are group companies.
Directors’ expenses and salary
This prohibition does not restrict a company from providing a director with funds to meet vouched, properly incurred business expenses. Nor does it prohibit a company from paying a director a wage or salary in the normal course of business.
What are the consequences for non-compliance?
The Companies Acts provides for civil and criminal penalties for non- compliance with this legislation.
Does the company’s auditor have any obligations here?
Yes, where a company’s auditor forms the opinion that particular breaches of the Companies Acts have occurred in a company, the auditor must make a report to the Director of Corporate Enforcement. In a situation where your auditor identifies an unlawful transaction with a company director, they may be required to report this.
Source: Institute of Certified Public Accountants in Ireland (CPA), www.cpaireland.ie