As directors, you and your colleagues hold the company’s purse strings. You can even borrow cash from it, but if you do company law imposes conditions. What are they and do you really have to bother with them?
In theory
As a director shareholder of a small company it’s easy to think of it as your business. The trouble is that the law doesn’t look at it that way. It treats a company as a separate “person” with its own rights. When you think of it that way you can understand why you can’t just take money from the company’s bank account and treat it as yours. However, the rules do allow you to borrow from your company, subject to conditions.
General rule
The general rule in the Companies Act 2006 is that loans to directors are allowed as long as the shareholders approve.
You don’t need shareholder approval for some loans. For example:
- loans up to £50,000 to cover expenditure on companybusiness, e.g. to buy new equipment on its behalf
- a loan to pay for a director’s legal costs in connection with a claim against them for negligence, breach of duty etc.; and
- loans totalling no more than £10,000.
Getting a loan approved
Where none of the exceptions above apply you must get a majority vote, i.e. 51% or more in favour, from the shareholders by passing an ordinary resolution. This might seem like a lot of hassle and red tape but, as you’ll see, it’s for a good reason.
If a loan isn’t approved you could be asked to repay it by your fellow directors or without notice regardless of what terms were agreed for repayment. Similarly, if the compa
ny runs into financial trouble its creditors could demand repayment – the company’s limited liability won’t protect you.
If you allow a fellow director to borrow money unapproved you could be held liable to pay it back if they can’t.
Better safe than sorry
Following procedure can seem like overkill but it’s one of those situations where everything is OK until something goes wrong and then you wish you had followed the rules. If the company runs into financial difficulties or there’s a dispute between directors – you would be surprised how often these occur – the focus then falls on money owed to the company by a director.
Connected borrowers
You can’t get around the approval procedure by getting the company to make an indirect loan to you through, say, a family member who is not a director. They count as connected persons, i.e. connected to you, and the same rules apply for loans the company makes to them.
A matter of interest. One final thing to watch out for is where the company charges interest on the loan. It might need to follow consumer credit legislation.
For directors’ loans exceeding £10,000 in total failing to follow procedure means repayment of the loan can be demanded without notice. Plus you could be made to repay a fellow director’s loan ifthey default. These risks can be avoided by getting the loan approved by passing an ordinary shareholders’ resolution.