An important point to note with respect to these types of transactions is that the term ‘directors’ now includes de-facto directors (Section 222) and as was previously the case, shadow directors. ‘Directors’ also still includes persons connected with directors and shadow directors (Section 221). Section 220 defines what persons are deemed to be ‘connected persons’ which also includes a body corporate if it is controlled by that director or by another body corporate that is controlled by that director. However, a body corporate is not to be regarded as a shadow director of any company or any of its subsidiaries. Use of the term ‘director’ throughout these sections is taken to refer to all of these above noted parties.
Loans made by the company – Section 236 specifically sets out the rules regarding any loan or quasi-loan* made by a company to a director of the company or its holding company. The basic principle is that if the terms of the loan are not set out clearly in writing (or are set out in writing but are not sufficiently clear), then it shall be presumed, until the contrary is proven, that:
- the loan is repayable on demand; and
- until such time as the loan is repaid, it has borne interest at the appropriate rate.
The appropriate rate is defined in the Act as 5% per annum or such other rate as may be specified by order made by the Minister (Section 2).
*A quasi-loan is where one party settles a liability for another party
Advances by a director to the company – Section 237 sets out the various rules regarding loans by directors to the company or its holding company. In this particular instance, where the terms of any transaction or arrangement by a director to the company or the holding company are not set out clearly in writing or are ambiguous as to whether the arrangement constitutes a loan or quasi-loan, then it is presumed that:
- the transaction constitutes neither a loan or a quasi-loan;
If this is the case, and the transaction is deemed to neither constitute a loan nor a quasi-loan, then it may reasonably be presumed to be a gift in which case the appropriate accounting treatment will need to be applied.
Where it is proved that the transaction does in fact constitute a loan but where the exact terms are ambiguous then under the provisions of the Act the actual nature or substance of the transaction or arrangement is alleged rather than formalised adequately in writing. Therefore, depending on which terms are ambiguous:
- the loan is deemed to bear no interest;
- the loan is presumed to not be secured; or
- where it is proved to be secured but the terms are ambiguous with regards to its priority, then it is deemed to be subordinate to all other debts of the company.
Prohibition of loans etc to directors and exceptions provided
The general rule of the Act with regards loans, quasi-loans, credit transactions or to provide security (or guarantee thereof), is that such transactions are prohibited to directors or parties connected to directors except under the following circumstances (Section 239):
- the arrangement is less than 10% of the company’s relevant assets* (Section 240);
- the relevant Summary Approval Procedure with regard to permitting loans to directors is followed (Section 242);
- the arrangement is with a group company (i.e. holding company, subsidiary or sister company) (Section 243);
- the arrangement is where the company enters into the transaction in the ordinary course of business and the value of the transaction is not greater than that which the company would offer to an ordinary person, taking out the same loan (Section 245).
*Relevant assets refer to the company’s net assets as determined by its latest statutory financial statements.
It is worth noting also that this prohibition does not extend the company from providing any of its directors with funds to meet vouched expenditure properly incurred or to be incurred (Section 244) provided any such liability arising therefrom is discharged within 6 months.
With respect to the 10% exemption; were the company’s net assets to fall, and by virtue of this the arrangement with the director come to represent more than 10% of the company’s net assets, then the company and the director, or other parties involved, must take reasonable steps to reduce the balances outstanding to be less than 10% once more and must do so within 2 months after the date of becoming aware or ought reasonably to have become aware of the situation. Where directors fail to take the reasonable steps to rectify this situation within the prescribed timeframe, the arrangements shall be voidable at the instance of the company. The Act now also provides that all officers of a company will be guilty of a Category 2 Offence should Section 239 be contravened which is a reportable offence.