The Role of Directors – Part 2

In the second article of this two-part series (The Role of Directors – PART 1), we examine the restrictions and disclosure requirements in relation to transactions between a company and its directors under the Companies Act 2014 (the “Act”). A director needs to be mindful of these provisions whenever a transaction or arrangement (including loans), that the company is entering into, may have a related party element.

What is a Connected Person?

The restrictions set out in the Act generally apply to transactions or arrangements involving a director or a person connected to a director. A connected person will include family members, any person in partnership with the director or any company controlled by the director.

Substantial Transactions involving Directors or Connected Persons

Section 238 of the Act provides that a company shall not enter into an arrangement where a director of the company or its holding company, or a person connected with such a director is to acquire a non-cash asset of requisite value from the company or vice versa unless the transaction is first approved by a resolution of the members of relevant company. A transaction of requisite value is one where the value of the asset concerned is worth at least €5,000 and it either exceeds €65,000 or 10% of the net assets of the company in question.

There are exceptions to this rule. For example, the group exemption provides that where group companies are transacting between themselves the provisions of section 238 will not apply. Other exemptions included are where a company is being wound up or the disposal of assets is being carried out by a receiver.

If none of these exemptions apply the company or companies involved, it’s important to note that the transaction must be approved by way of ordinary resolution of the members of the company. Without this the transaction will be voidable at the instance of the company.

Prohibition on Loans to Directors or Connected Persons

Under Section 239 of the Act there is a prohibition on a company making a loan or a quasi-loan, entering into a credit transaction as creditor or entering into a guarantee or granting security for a director of the company or its holding company, or to a person connected with such a director.

Again, exemptions apply. A loan will not be caught by this provision where it is a loan between group companies, where the loan is in the ordinary course of business and on arm’s length terms, where the director has incurred properly vouched expenditure or where the transaction is less than 10% of the value of the company’s relevant assets. It is of note that there is a clawback provision where if, after the event, the total amount outstanding goes above 10% of the company’s asset value (either because of interest accrued or a fall in the asset value), the directors have a duty to amend the terms of the loan so that the outstanding amount falls within the required percentage limit.

If no exemptions apply the transaction will need to be approved with the summary approval procedure, which involves (a) the directors making a declaration that the company, having entered into the transaction, will be able to meet its debts as they fall due and (b) the members of the company approving the transaction. Without this, the transaction will be voidable at the instance of the company. It is important for directors to be aware that there is potential personal liability for the directors making the declaration if it transpires that it was not made on reasonable grounds.

Loans to be Evidenced in Writing

Loans to a Director: Section 236 of the Act provides that any loan made by a company to its directors or the directors of its holding company or a person connected to them must be recorded in writing. If there is no written evidence of such a loan, there is a rebuttable presumption that the loan is repayable on demand and bears interest of 5% or such other rate as may be specified by ministerial order. This provision will also apply where a loan is in writing, but the terms of the loan are ambiguous, making it necessary to clearly and specifically evidence said terms in a loan agreement.

Loans from a Director: Under Section 237 of the Act, if a loan is made to a company by a director of a company or its holding company or a person connected to a director and the loan has not been evidenced in writing, there is a rebuttable presumption that the payment made was not a loan. If it can be shown that it was in fact a loan, then the converse of section 236 applies and it is presumed the loan is interest free, unsecured and subordinated to all other debts of the company. As with Section 236, the provisions of Section 237 apply where a loan is evidenced in writing, but the terms are ambiguous.

Therefore, in any case which comes before a court relating to a loan to or from a company where the terms are not evidenced in writing, the court will presume terms which are unfavourable to the director concerned.

Disclosure of Interests

Directors are required to disclose to the company any interests that they may have in a contract with the company, whether it be direct or indirect. Their interest must be declared at a meeting of the directors of the company, and a record of such interests of directors must be kept by the company and be available for inspection upon request by the ODCE.

Under Chapter 5 Part 5 of the Act, companies are also required to keep a separate register of the interests its directors and any connected persons hold in the company’s shares. A director or secretary must notify the company of any interests they hold in shares of that company or a related company. This also applies to interests other than shares including debentures, a right to subscribe for shares or debentures in a group company, entering into contracts to assign or sell shares of a group company or ceases to hold shares or debentures. For each type of interest that must be disclosed under this Part of the Act there are varying time frames for notification, and failure to notify the company within the prescribed time frame may mean no right or interest in shares or debentures will be enforceable by the director or secretary concerned.

In light of the above, the importance of proper procedure and records of transactions with directors cannot be overstated and it is clear that the maintenance of statutory registers and records is a key obligation of any company. Directors must be particularly cognisant of the requirements set out in the Act in relation to connected party transactions.

How we can help

If you have any queries or concerns, or would like to discuss the above in further detail, please feel free to contact Joe McVeigh, in the Corporate Department of BHSM on 01 440 8300 or jmcveigh@bhsm.ie for further information.

This article is for general information purposes. Legal advice must be obtained for individual circumstances. Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.