May 2005

The contractor may be instructed to collect an outstanding director's loan account but only once the amount due has been established by the official receiver.

Any loan by the company to one of its directors should be one that it is permitted to make in accordance with the Companies Act 1985 [note1]. Public companies and private companies that are part of a group of companies that includes a public company are not permitted to make any loan, quasi-loan, credit transaction or guarantee to provide security for the benefit of a director or a person connected to a director unless specifically sanctioned by the Companies Act 1985 . For the purpose of these sections ‘director’ includes a shadow director [note 2].

If a prohibited transaction has occurred then:

1. In the case of a transaction with a director, that director;

2. In the case of a transaction with a person connected with a director, both that person and the director with whom he is or was connected; and

3. Any other director who authorised the transaction;

will be jointly and severally liable to account for any profit and to indemnify the company for any loss or damage suffered as a result of the transaction (e.g. should the loan debtor fail to pay or the company fail to pay or the company be called upon to pay under a prohibited guarantee) [note 3]. It is also a criminal offence for an individual to knowingly permit a prohibited transaction to take place [note 4].

The official receiver should supply the contractor with a copy of the director's loan account or a schedule of how the outstanding balance has been calculated. Where possible the director's acknowledgment of the debt should also be sought and supplied to the contractor.

The contractor will refer any new evidence or meaningful argument on the debt supplied by the director back to the official receiver for consideration. If necessary, the director and/or the other person(s) should be interviewed again to establish the necessary information to enable the asset to be realised.

31.1.35 Personal loans and intercompany loans

Personal loans and inter company loans can be included as a book debt if they are collectable by the contractor without further enquiry. Where further investigation is necessary into these loans, the contractor should not be instructed until all lines of enquiry have been finalised. If in doubt, the official receiver should consider contacting the contractor directly to discuss the situation.

A company within a group (i.e. a holding company and its subsidiaries) is not prohibited from making a loan to another company within that group by reason only that a director is a director of both companies [note 5]

[Back to Part 2 - The book debt contractor] [On to Part 4 - Insolvency practitioners and the contractor]