The implementation of the Companies Act 2006 (CA 06) and specifically Section 413 has not been short of controversy since its arrival.
This area of the Companies Act has been extremely poorly drafted and there seems to be an understandable amount of confusion concerning the disclosure requirements contained within Section 413.
This article will look at the issue concerning loans to directors, specifically for companies who apply FRSSE and offer a possible ‘common sense’ approach to disclosure of advances to directors.
Section 197(1) of CA 06 does make a general prohibition on loans to directors and also related guarantees or provisions of security where the approval of the shareholders is not obtained. However, such approval is not required for ‘minor’ loans i.e. if the aggregate value of the transaction(s) does not exceed £10,000, and companies are not prohibited under CA 06 to make such loans.
If advances are made to directors which exceed £10,000 then member approval must be obtained which can be in the form of a board resolution.
Advances to Directors
The problem child is advances to directors and what to disclose. S413 requires the following details to be disclosed in respect of advances:
- its amount
- an indication of the interest rate
- its main conditions
- any amounts repaid
In addition, the notes to the financial statements must also disclose:
- the total amounts stated in (1)
- the total amounts stated in (4)