Director Dealings – 5 Flashpoints

In this article, we will look at the topics of accountability and transparency, highlighting arrangements and dealings between a company and its directors that would breach English company law, whether undertaken knowingly, or not.

In situations where the directors and majority shareholders approve of the relevant arrangement, it is tempting to consider the breaches as "technical", and of little consequence. However, in the context of a due diligence exercise (e.g. on a sale), a shareholder complaint or dispute, a credit default or an insolvency process, the consequences for the directors can be severe, and can include personal liability for any resulting losses.

The five arrangements below are common examples rather than an exhaustive list, and each may, in addition, leave the director vulnerable to accusations of breach of duty or may place the director in a position of conflict.

1. Loans to directors

   Sometimes it makes business sense to give a loan to a director: for example, to cover relocation costs or to purchase shares, as is common in private equity-owned structures. But companies are generally prohibited from making any substantial loans to directors without shareholder approval. Any time there are director loans contemplated that, taken together, add up to more than £10,000, the board is exposing itself to risk if it neglects to put the deal to the shareholders.

   The prohibitions also capture equivalent situations, such as when the company merely gives a guarantee for a loan, advanced to a director; lends money to a family member of the director; or makes a so-called "quasi-loan". A quasi-loan is a contractual relationship in which a new lender (such as the company) promises to settle an existing debt of the borrower (for example, that of a director to a bank), in return for a promise that the borrower will pay back the company, later.

   The consequences for a director of making a prohibited loan can be very severe. The director who received the loan and any director who authorised the transaction can be made to personally compensate the company for any profit any director makes, and all the losses resulting from the loan, which could be the entire value of the loan, if it is unrecoverable. Because of the personal liability involved, companies and directors should consider legal advice whenever loans to directors are discussed.

2. Substantial property transactions

   Before a company buys or sells a non-cash asset from or to a director...