In Irish law, Part III of the Companies Act, 1990 ("the 1990 Act") sets out a number of restrictions on loans being made to Directors and connected persons in an attempt to prevent an abuse of power which could be detrimental to the interests of shareholders and creditors.
Section 31 of the 1990 Act prohibits a company from making loans or quasi loans, entering into credit transactions, or providing guarantees or security in connection with loans, quasi loans or credit transactions in favour of Directors and connected persons. The term ‘Directors’ includes the Company’s own Directors, the Directors of its holding company and Shadow Directors of the Company or its holding company. The term ‘connected persons’ includes a Director's spouse, parent, brother, sister, child or business partner, a trustee who holds on trust for the Director, his spouse or any children or any Corporate Body which is controlled by the Director.
The 5 Exceptions
1. The 10% Rule
Loans, quasi loans and credit transactions will be permissible if the aggregate does not exceed 10% of the Company’s relevant assets. Relevant assets are defined as the total assets less total liabilities as per the most recent Balance Sheet laid before the shareholders at an AGM or, in cases where no Balance Sheet has been laid before the shareholders, the Company’s share capital.
Guarantees and securities in connection with loans, quasi loans and credit transactions are permissible if approved by special resolution of the shareholders within 12 months. The Directors must also provide a statutory declaration stating that, having examined the Company’s affairs, they are satisfied that the transaction will not have a detrimental impact on the Company’s ability to pay its debts as they fall due. This statutory declaration must be accompanied by a report of an independent person who is qualified to be an auditor of the Company.
3. Group Transactions
Transactions otherwise prohibited by Section 31 will be permitted if they are made by one member of a group of Companies in favour of another member of that group.
Funds provided to meet vouched expenses which are incurred or will be incurred by a Director in the course of their ordinary duties are exempt from the provisions of Section 31. However, if such funds are received in advance and the expenses do not arise, the Director must repay the funds to the Company within 6 months of receipt.
5. Transactions in the Ordinary Course of Business
Transactions covered by Section 31 are permitted where such transactions are made in the ordinary course of business and the Director or connected person does not receive more favourable terms than would otherwise be offered.
The consequences of a breach of Section 31 include the following:
- The transaction is voidable at the instance of the Company
- Personal liability may be imposed upon the Directors where the Company is insolvent
- Directors may be restricted where the Company is insolvent.