When a director borrows money from their company for personal use there are a number of legal and tax issues to be considered.
Directors’ loans and the Companies Act 2014
The Companies Act 2014 prohibits directors or connected parties to them been given loans greater than 10% of the company’s net assets except in certain circumstances. One of the circumstances is where the relevant Summary Approval Procedure is followed allowing a company to provide a loan of greater than 10% of the company’s net assets to a director or connected parties to them. This is a declaration which set out the details of the transaction this must be delivered to the CRO with 21 days of the loan being made. The use of the SAP to legalise a director’s loan arrangement could expose all directors to unlimited personal liability for the debts of the company. Prior to utilising the SAP to legalise an activity, the directors should carefully consider the fact that they could be exposing themselves to unlimited liability.
If a company does provide a loan greater than 10% of the company’s net assets to a director outside of these exceptions, they are in breach of company law. If this breach is brought to the attention of the Director of Corporate Enforcement, it may result in ODCE issuing proceedings against the directors of the company. This is particularly relevant to companies without audit exemption as auditors are legally obliged to report a breach of the directors’ loan legislation to the ODCE.
If the company goes into liquidation and the liquidator determines that the director’s loan was a major contributory cause for the company’s insolvency, then the director may be held personally liable for all of the company’s debts.
Tax Implications of Directors’ loans
There are a number of tax implications in relation to directors’ loans:
How can a director repay a director’s loan?