Companies Act 1985 and directors’ loan accounts


Added February 2012

Companies Act 1985 and directors’ loan accounts

The Companies Act 2006 introduced new rules governing directors’ loans and similar transactions. However, loans prior to 1 October 2007 may still be prohibited under the Companies Act 1985. To assist staff who may have to deal with a loan or loans agreed prior to 1 October 2007 the advice given in the previous version of Chapter 31.1 is reproduced below.

Directors loan account (previously paragraph 31.1.34)

The contractor may be instructed to collect an outstanding director's loan account but only once the amount due has been established by the official receiver.

Any loan by the company to one of its directors should be one that it is permitted to make in accordance with the Companies Act 1985 [see The Companies Act 1985 sections 330 to 338]. Public companies and private companies that are part of a group of companies that includes a public company are not permitted to make any loan, quasi-loan, credit transaction or guarantee to provide security for the benefit of a director or a person connected to a director unless specifically sanctioned by the Companies Act 1985 . For the purpose of these sections ‘director’ includes a shadow director [See The Companies Act 1985 section 330 (5)].

If a prohibited transaction has occurred then:

a. In the case of a transaction with a director, that director;

b. In the case of a transaction with a person connected with a director, both that person and the director with whom he is or was connected; and

c. Any other director who authorised the transaction;

will be jointly and severally liable to account for any profit and 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) [see The Companies Act 1985 section 341]. It is also a criminal offence for an individual to knowingly permit a prohibited transaction to take place [see The Companies Act 1985 section 342].

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.