Part 3 Loans to Connected Parties

February 2012

31.1.34a Directors’ loan accounts and similar transactions

Generally a company may only make a loan to one of its directors or to a director of its holding company where the loan has been approved by resolution of its members (see paragraph 75.110). There are some exceptions to this which are listed in paragraph 75.111 [Note 1].

31.1.34b Public companies and directors’ loan accounts

A public company, and a private company which is part of a group of companies that includes a public company, may make a loan, quasi-loan (see  paragraphs 75.112 and 75.113), credit transaction (see paragraphs 75.115 and 75.116) or guarantee to provide security for the benefit of a director or a person connected to a director (see paragraphs 75.114 and 75.116) where it is approved by resolution of its members subject to the exceptions listed in paragraph 75.111 [Note 2]. Where the director is also a director of a holding company a resolution of the members of the holding company endorsing the loan or transaction is also required. For these purposes a director includes a shadow director [Note 3]. 

31.1.34c Notice re directors’ loan accounts and similar transactions

Where a loan, etc is made the company must give notice to its members setting out the nature of the transaction, the amount and purpose of the transaction and the extent of the company’s liability related to the transaction [Note 4].

31.1.34d Outstanding director’s loan account or similar transactions - approved

Where the loan or other transaction has been approved by the members of the company (and, where appropriate, the members of the holding company [Note 5]), the official receiver should determine the amount outstanding by making enquiries of the company’s director(s) and/or by reference to the company’s records.   

31.1.34e Voidable director’s loan account or similar transactions

Where the loan or other transaction has not been approved by the members of the company and, where appropriate, the members of the holding company, it is voidable unless:

• Restitution of any money or other asset is no longer possible,
• The company has been indemnified for any loss for damage resulting from the loan or other arrangement, or
• A person, who is not a party to loan or transaction and has not been given notice of the contravention, acquired rights as a result of the loan or transaction which would be affected by the avoidance [Note 6].

31.1.34f Collection of directors’ loan accounts or similar transactions

The contractor may be instructed to collect a voidable or outstanding director's loan account but only once the amount due has been established by the official receiver. The monies may be collected from:

• in the case of a transaction with a director, that director;
• in the case of a transaction with a person connected with a director, both that person and the director with whom he/she is or was connected; and
• any other director who authorised the transaction. ;

Where the monies may be collected from two or more persons they will be jointly and severally liable to account for any profit and/or to indemnify the company for any loss or damage suffered as a result of the transaction (e.g. should the loan debtor fail to pay or the company fail to pay or the company be called upon to pay under a prohibited guarantee) [Note 7].

If the loan or similar transaction was made before 1 October 2007 it may be prohibited and therefore collectable. If it is prohibited it is also a criminal offence for an individual to knowingly permit the loan or transaction to take place [Note 8]. Further advice on whether the loan or transaction is prohibited is provided in Annex 1.

31.1.34g Information to be provided to the contractor

The official receiver should supply the contractor with a copy of the director's loan account or a schedule of how the outstanding balance has been calculated. Where possible the director's acknowledgment of the debt should also be sought and supplied to the contractor. The contractor will refer any new evidence or meaningful argument on the debt supplied by the director back to the official receiver for consideration. If necessary, the director and/or the other person(s) should be interviewed again to establish the necessary information to enable the asset to be realised.

31.1.35 Other personal loans and intercompany loans

Personal loans (other than to directors, etc. see paragraph 31.1.34a) and inter company loans can be included as book debts if they are collectable by the contractor without further enquiry. Where further enquiries are necessary into these loans, the contractor should not be instructed until the enquiries have been completed. If in doubt, the official receiver should consider contacting the contractor directly to discuss the situation.

A company within a group (i.e. a holding company and its subsidiaries) is not prohibited from making a loan to another company within that group by reason only that a director is a director of both companies [Note 9].