The Companies Act 1990 outlines strict rules for directors who borrow from companies and who buy or sell their company property assets. The purpose of these rules is to protect the company’s assets in the interest of the business and all its owners and creditors. Here, we answer some common queries including;
- Who do these rules apply to?
- What are the rules?
- What are the implications for non-compliance?
Who do the Companies Act 1990 rules apply to?
These rules apply to all company directors and all connected persons. Connected persons include;
- civil partners,
- brothers and sisters.
‘Connected persons’ also include companies that the directors have control over. In order to control a company, the director and connected persons must own 50% or more of the company shares.
What are the rules for directors?
The general rules are as follows;
1. Substantial property transactions with directors (Section 3.0)
Covers the purchase of sale of non – cash company assets (i.e. property)
This applies to non-cash assets whose value is equal to or greater than €1,270 and exceeds €63,487 or 10% of net relevant assets (which ever is the smallest figure.)
Net relevant earnings are the aggregate of its assets less the aggregate of its liabilities (including provisions for liabilities or charges) as shown in the last preceding financials laid before the AGM. In the event of no financials being available the called up share capital is used.
If the director wishes to enter into such a transaction, prior approval must be given by the shareholders. If prior approval is not received then the transaction is voidable by the company unless an innocent third party is affected. Any gain by the director must be surrendered and any loss by the company must be made good.
2. Loans and similar transactions involving directors (Section 5.0)
Directors and connected persons are generally not allowed to borrow money from the directors companies. There are five exceptions to the general prohibition.
Five exceptions to loans and similar transactions rules
- Arrangement within 10% of Relevant EarningsThis exception states that any loans, quasi-loans (payment or agreement to pay a sum on behalf of another) and credit transactions are legal if all the company loans taken out by all the directors and connected persons total less than one tenth of the company relevant assets.This is this most commonly availed of exception, however it should be noted that this does not apply to guarantees or to the provision of security.If the loans breach the 10% rule then they must act i.e. repay some or the entire loan within 2 months to correct the situation.
- Approved arrangementsA company can enter into a guarantee or provide security in connection with a loan to a director or connected person if the arrangement is pre-approved by a special resolution of the company, i.e. 75% of the shareholders must approve the transaction in advance.The transaction has no effect unless it is accompanied by an auditor’s report. The auditor must give his/her opinion on the reasonableness of the directors declaration. In the current climate it would be considered unusual for an auditor to give such a report.
- Arrangements between Group CompaniesA company may provide a loan or quasi-loan to another company if that other company is its holding company, subsidiary or sister company. That means there is no restriction in a group situation, but it must be recognised as a group under the legislation (section 155 Companies Act 1963). All transactions are permitted either vertically or horizontally.A common scenario involves two individual companies with similar shareholders or directors, with one company holding a nominal share in the other company. This is known as a ‘Golden Share’ arrangement and it allows loans between companies without breaching Company Law.
- Directors ExpensesA company can cover business expenses that the directors pay for. This is only as long as the business expenses have been properly incurred for the purposes of enabling the directors to discharge their duties as directors of the company.
- LenderIf a company, for example a bank, lends money as part of its business, it can lend to its directors as long as the loans are on the same terms as the company (bank) would offer to an ordinary person taking out the same loan.
Implications of non-compliance with Companies Act 1990
There are serious consequences for non-compliance with the above rules. Borrowing more than is allowed from a company can be a criminal or civil offence and directors should be aware of the rules which govern loans and transactions with directors.
- Consequences include;
- Transaction cancelled and repayment ordered
- The company can require an indemnity for any losses from the transaction
- A person who benefits from the transaction may be held personally liable for company debts
- Criminal penalties can be imposed, including;
- On summary conviction, a fine of €1,904 and/or 12 months imprisonment,
- On conviction on indictment, a fine of €12,697 and/or 5 years imprisonment.
Directors should note that auditors are required to report to the Office of the Director of Corporate Enforcement (ODCE) where they have found reasonable grounds that a director has committed an indictable offence under the Companies Act. Details in relation to the transaction may have to be disclosed in the notes to the financial statements.
If you wish to discuss any of the above in greater detail please do not hesitate to contact us on 01-2804731 or via our contact form on the right of this page.
Every care has been taken to ensure that the information as detailed above is correct. You must not rely on the information on this website as an alternative to advice from your Accountant, Tax Advisor or other professional services provider.