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Countdown to the Companies Act 2014: Day4


Thursday, May 21, 2015

There are now 7 working days until the Companies Act 2014 (the “Act”) comes into force in Ireland. The Act will radically change the existing legal framework for companies in Ireland. Each day, we will provide you with a snapshot of key changes to consider in advance of the Act commencing on June 1st.

Directors’ loans

The Companies Act 2014 restates much of the law relating to transactions between companies and their directors. One significant innovation is to set out evidential rules regarding loans by a director to a company, and vice versa. In many cases such loans are made on an informal basis and are not (or inadequately) documented, giving rise to difficulties in particular in insolvency situations.

Loans by a director into the company

For the first time, the Act sets out rules regarding loans made by directors (or connected persons) to a company or its holding company (Section 237).

If the terms of the loan are not set out in writing, or are set out in writing but are ambiguous, then a rebuttable presumption arises in favour of the company that no loan was made to the company, i.e. that is was effectively a gift.

If it is proven that the transaction constitutes a loan to the company, but the exact terms of the loan are ambiguous, there is a further rebuttable presumption that any such loan is:

  • interest free;
  • unsecured; and
  • subordinate to all other indebtedness of the company

This follows a recommendation from the Company Law Review Group to address the issue of directors of companies being wound up, claiming they are creditors (of uncorroborated loans).

In particular given the extent to which early-stage and closely held companies rely on such loans, it is become ever more crucial after 1 June that they be adequately documented.   It is important to note that the definition of director includes “connected persons”.

Loans from the company to a director

Similar evidential provisions have been introduced regarding loans made by a company to a director or connected person (s. 236). 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 as currently defined by the Act being 5% per annum, or as may be specified by Ministerial Order.

Substantial property transactions and loans, quasi loans, credit transactions, etc, involving directors

The current law will remain largely unchanged regarding substantial property transactions with directors and connected persons (current s.29 Companies Act 1990). This is now in section 238 of the Act.

The Act continues the current prohibition on a company making loans and quasi-loans and entering into credit transactions or guarantees with directors (currently s.31 Companies Act 1990). It will however become significantly easier to fall within an exception to this prohibition, as the Act allows the Summary Approval Procedure may be availed of, and there is no longer a requirement to have a report of an independent person on the reasonableness of the directors’ declaration of solvency.

 

The content of this article is provided for information purposes and does not constitute legal or other advice.


Author

Eoghan Doyle

PARTNER


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