Ltd company loans

[zadumbreion]

I realise that a ltd co making loans to directors is iffy (and can be illegal), and making interest-free loans to employees would require them to declare a benefit-in-kind; but which regulations apply if a company chooses to loan money interest-free to someone who is neither a director of said company, nor an employee?

Edited by zadumbreion on Monday 5th January 21:26

[Eric Mc]

If that person is "connected" to a director or employee of the company, then the loan will be governed by the same rules.
The definition of "connected" is pretty wide but usually means a spouse, a relative or someone connected to a spouse or relative.
A shareholder would also be defined as a "connected person".

[zadumbreion]

Eric Mc said:

If that person is "connected" to a director or employee of the company, then the loan will be governed by the same rules.
The definition of "connected" is pretty wide but usually means a spouse, a relative or someone connected to a spouse or relative.
A shareholder would also be defined as a "connected person".

But not a friend....?

[Eric Mc]

Possibly - although the definition of "connected person" has been widened considerably under the 2006 Companies Act. I would check out the Companies House website for the latest interpretation of what being "connected" actually means.

Edited by Eric Mc on Tuesday 6th January 12:26

[mas99]

Given that the duty of the directors is to protect company assets and make a profit, why would they choose to make an interest free loan to an unconnected person?

I'd regard this as worthy of further investigation if I were an HMRC bod.

[skwdenyer]

mas99 said:

Given that the duty of the directors is to protect company assets and make a profit, why would they choose to make an interest free loan to an unconnected person?

I'd regard this as worthy of further investigation if I were an HMRC bod.

It is not the duty of the Director(s) to make a profit - that is usually merely an aspiration. Nor is it explicitly a duty to protect a company's assets, only to operate in the shareholders' best interests.

Note that the new Companies Act has widened the Directors' responsibilities to include various social and other obligations. It is possible that an interest-free loan to an unconnected party (such as to a community group) could fall within those new, revised legal duties.

Since an interest-free loan would not, by its nature, be any form of business investment (unless there was something more complex going on, such as lending start-up capital in return for a share of future profits), it might be that (depending upon the Articles) it would need specific shareholder approval.