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The basic rule: shareholder approval above £10,000
Under the Companies Act 2006, a private company may make a loan to a director only if the aggregate of existing and proposed loans to that director does not exceed £10,000. Above that threshold, shareholder approval by ordinary resolution is required before the transaction is entered into. The resolution must be passed in advance — ratification after the fact does not cure the breach.
The £10,000 limit applies to the company making the loan, not to connected companies in a group. Separate group companies each have their own threshold, though arrangements designed to avoid the limits by routing through related entities may still be caught by the connected-person rules.
Connected persons and shadow directors
The restrictions extend to loans made to persons connected with the director — including spouses, civil partners, children and step-children under 18, and companies in which the director holds more than 20% of the voting shares. A transaction structured as a loan to a connected party to benefit the director indirectly is still caught by the rules.
Shadow directors — those in accordance with whose instructions the formal directors are accustomed to act — are also subject to the same provisions. Lenders and investors who exert de facto control may inadvertently become shadow directors, so the boundaries of who is caught by these rules deserve careful attention in complex structures.
Consequences of an unlawful director loan
A loan made in breach of the Companies Act 2006 is voidable at the instance of the company. The company can rescind the transaction, require repayment of the principal, and account for any gain made. The director, and any other person who authorised the transaction knowing it to be unlawful, may also face civil liability for the loss caused to the company.
Voidable does not mean automatically void: the company may ratify the transaction by ordinary resolution after the event in some circumstances, but shareholder approval must be unconditional and informed. Any director who has received an unlawful loan should take legal advice before attempting to regularise the position.
Practical housekeeping for small private companies
In owner-managed businesses where the director is also the majority shareholder, obtaining shareholder approval is straightforward but still must be done formally. A written resolution signed by the relevant shareholders, or a properly constituted general meeting, is required. Board minutes alone are not sufficient for the shareholder approval step.
Companies should also keep a register of loans to directors as part of the statutory register obligations and disclose related party transactions in the annual accounts. Accountants preparing accounts for small companies will typically flag any DLA movements for proper classification and disclosure.
Frequently asked questions
Does shareholder approval mean all shareholders must agree?
No. An ordinary resolution requires a simple majority of votes cast. In a company where the director holds more than 50% of voting shares, they can in principle vote in favour themselves — though some lenders and advisers recommend the director abstains where there is a conflict of interest, to protect against later challenge.
Are there different rules for public companies?
Yes. Public companies face stricter restrictions, and many director loans are outright prohibited unless specific exemptions apply, regardless of the amount. If your company is or is considering becoming public, take specific legal advice on director transaction rules.
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