A common issue among companies is the giving of loans between companies and to Directors. However, there are company law rules governing the provision of loans and companies need to ensure they are compliant with the law. In Ireland, the majority of Private Limited Companies are owned by two or three shareholders. If these companies want to expand, they usually set up a new company using the same shareholders. These companies are referred to as being in a "group" as they have the same shareholders in each Company. However, Company Law has a different definition of what constitutes a group.

Definition of a Group

Section 155 of Companies Act, 1963, defines a group as two companies, one being the holding company and the other being a subsidiary. To be in a group, the holding company must:

(1)  hold more than 50% of the nominal equity share capital, or

(2)  hold more than 50% of the voting rights, or

(3)  is a member and controls the composition of the board of the subsidiary company.

The majority of companies in Ireland are owed by 2 shareholders or "husband and wife" companies and if they are the only shareholders in each of the "group" companies, the companies are not in a group as defined by the Companies Acts.

One of the key benefits of companies being in a Group as defined by the Companies Acts is that you can avail of the Group exception under the regulations regarding loans between companies.

Sec 31 Companies Act, 1990

Section 31 of Companies Acts, 1990 prohibits companies from entering into certain types of transactions, which would be otherwise be lawful, for the benefit of a director or a party connected with a director. The legislation was introduced to prevent the controllers of companies abusing their positions of power by diverting company assets to themselves, whether directly or indirectly. A company may not:

1.      Make a loan, quasi loan, or guarantee to a director of the company or of its holding company or to a person connected with such a director. 

2.     Enter into a credit transaction as creditor for such a director or a person so connected

3.     Enter into a guarantee or grant security in connection with a loan, quasi-loan or credit transaction to any other person for such a director or a person so connected

Connected Persons

Section 26 Companies Act, 1990 defines a connected person as, a person is connected with a director if a company if he or she is a near relative of the director, is in business partnership with the director, acts as a trustee for a trust, near relatives, any body corporate which the director controls.  A Director of a company shall be deemed to control a body corporate where he or she either alone or together with any other director or directors of the company or any persons connected with the director or such other directors, are interested in 50% or more of the equity share capital of that body or are entitled to exercise or control the exercise of 50% or more of the voting power at any general meeting of that body. Shadow Directors and sole members are also considered as connected persons.

Persons who are Directors and connected persons

• Directors of a Co.
• Shadow Directors of a Co.
• Directors of a Holding Co.
• Shadow Directors of a Hold Co.
• The spouse, parent, brother, sister, Child of a Director of a Co. or Hold Co.
• The partner of a Director of a company or its Hold Co.
• Trustees where the principal beneficiaries of the trust are a Director, his spouse, any of his children or any body corporate he controls
• A body corporate controlled by a director of a Co. or of its Hold Co.
• A body corporate controlled by a body corporate that is itself controlled by a Director of a Co. or its hold Co.
• The sole member of a single-member private limited company

Exceptions

In order for companies not to breach the regulations in relation to the loans, there are a number of exceptions that a company can avail of. They are as follows:

• The loan is under 10% of the relevant assets,
• The directors follow a statutory validation procedure,
• The Group exception,
• The transaction is a valid Directors expense,
• The transaction is a normal business transaction.

Golden Share

The Group exception is the most commonly used exception. It has been outlined above what defines a group. The purpose of the “golden share” is to give the holder of the golden share the power to control the board of the subsidiary company and thus the companies will then be in a group pursuant to the definition in the Companies Acts. The "Golden Share" is typically an "A" Ordinary Share with the rights to control the composition of the board. This structure allows companies to loan money between companies without being in breach of the legislation. A downside to putting all your companies into a group is the companies will be unable to claim the exemption from having your accounts audited.

In order to put a golden share in place, the company issuing the golden share is required pass special resolutions to set up the new share class and to amend their Memorandum and Articles of Association inserting the new share class and the rights attached to the golden share.

Consequence of Breach

It is important to ensure that you are not in breach of these loans. If the provisions of Section 31 are breached the transaction is voidable at the instance of the company which means the company can cancel or reverse the transaction. Any Director, shadow director or connected person who authorized the transaction is liable to account to the company for any gain made by them and is liable to indemnify the company for any loss suffered as a result. If the company is dissolved and it is believed that the breach of Sec 31 contributed to the insolvency of the company then the person who benefited from the transaction may be made personally liable for the debts of the company.

Auditor Reporting a Breach

A breach of Sec 31 loans is a reportable indictable offence under the Companies Acts. Sec 194 Companies Act, 1990 states, “Where in the course of, and by virtue of, their carrying out an audit of the accounts of the company, information comes into the possession of the auditors of a company that leads them to form the opinion that there are reasonable grounds for believing that the company or an officer or an agent of it has committed an indictable offence under the Companies Acts (other than an indictable offence under section 125(2) or 127(12) of the Principal Act), the auditors shall, forthwith after having formed it, notify that opinion to the Director and provide the Director with details of the grounds on which they have formed that opinion.” The ODCE will then decide what course of action to take. This may include writing to the Directors and informing them of the breach and or taking a prosecution against the Directors.

In 2008, the ODCE secured a suspended prison sentence of a Director who was in breach of regulations regarding loans. In the current economic environment, Directors maybe tempted to breach the rules regarding loans to Directors and other companies. If these companies are dissolved, the Directors maybe held personally liable for the debts of the company if they were in breach of the regulations.

All business advisors should be aware of the provisions of Section 31 and if they identify a suspected breach or if a proposed transaction is likely to breach the provisions then you should advise the Directors accordingly.