Case Background & Strategy

Section 224 of the Companies Act 2016 prohibits a company (other than an exempt private company) from making a loan to a director of the company or its holding company, or giving any guarantee or security in connection with such a loan. Section 225 extends similar restrictions to loans to persons connected with directors. Limited statutory exceptions apply, and breach attracts both civil and criminal consequences.

What the prohibition covers

The prohibition captures direct loans, guarantees and security supporting third-party loans to the director. ‘Connected persons’ under section 197 — including family members and companies the director controls — bring indirect structures within section 225. Courts look at substance: advances dressed up as ‘expense floats’ or perpetual ‘amounts due from director’ in the accounts are recurring red flags in disputes and audits.

The exceptions

Key exceptions include loans to meet expenditure incurred for company purposes or to enable the director properly to perform duties (subject to approval and repayment conditions), loans to full-time directors for housing, loans made in the ordinary course of a money-lending business, and intra-group arrangements for exempt private companies. Each exception has specific conditions — approval at a general meeting, disclosure, and repayment mechanics — which must be strictly satisfied.

Consequences of breach

An unlawful loan is recoverable by the company, directors who authorised it may be liable for any loss, and criminal penalties can follow. In shareholder disputes and insolvency, director loan accounts are among the first items examined — cleaning them up (or proving them) early is often decisive.

Frequently asked questions

Can an exempt private company lend to its director?

Exempt private companies enjoy a carve-out, but the loan must still be properly authorised and consistent with directors’ duties.

Does the prohibition cover loans from subsidiaries?

Loans by a company to directors of its holding company are caught; group structures do not launder the restriction away.

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