The Companies Act, 2014 places a bar on companies being permitted to give loans to their directors.
The provision is contained in section 239 but there are a few exceptions to this section. The exceptions apply where the value of the loan does not exceed 10% of the company’s assets or where the company opts to apply for inter-group loans.
Penalties under the Act
Under the Companies Act 2014 Category 2 offences carry specific penalties.
Summary Conviction:
If someone is found guilty of a Category 2 offence and convicted summarily, they can face:
- A class A fine (the specific amount may vary).
- Imprisonment for a term not exceeding 12 months.
- Both fine and imprisonment.
Conviction on Indictment:
If the conviction occurs on indictment, the penalties are more severe:
- A fine not exceeding €50,000.
- Imprisonment for a term not exceeding 5 years.
- Both fine and imprisonment
Duty of Auditors
Company auditors must notify the Corporate Enforcement Authority (CEA) where on carrying out an audit they discover information where they believe that directors may have breached section 239.
Protection of Creditors
The purpose of the Section is to protect the company’s creditors, so if directors are in any doubt about their proposed actions or if they qualify under the exceptions, they should consult with their solicitors. If the company’s trading position is delicate or if an insolvency situation is possible, then directors taking loans from the company could face serious consequences.
Conclusion
If directors are in any doubt about taking out a loan from a company regardless of the company’s financial position, they should consult their solicitor. It will be money well spent.