Loans and quasi-loans from companies to directors

Where a loan or quasi-loan from a company to a director is ‘not in writing’, s 236(2) of the Act provides:

In relevant proceedings if the terms of the loan or quasi-loan are not in writing then it shall be presumed, until the contrary is proved, that–

• (a) the loan or quasi-loan is repayable on demand; and
• (b) for any period before repayment of the amount of the loan or quasi-loan (or for any period before repayment of part of that amount) the amount or part has borne interest at the appropriate rate.

‘Relevant proceedings’ is defined as meaning civil proceedings in which it is claimed that a company had made a loan or quasi-loan to a director of the company or its holding company or a person connected with a director of any such company. It will be noted, therefore, that it is not just loans in favour of natural persons that are caught by s 236: loans and quasi-loans by companies to other companies that are persons connected with a director are also caught. 176 Moreover, the fact that the loan or quasi-loan is made to another company in the same group as the company making the loan or quasi-loan (and it has already been explained how a company can be a subsidiary and still a person connected with a director) 177 does not excuse the need to reduce their terms to writing.

The presumptions are two-fold. First, that the loan is repayable on demand; second, that interest has been accruing on the loan at the ‘appropriate rate’. The appropriate rate is defined by s 2(1) of the Act as 5% or such other rate as may be specified by order of the Minister for Jobs, etc, under s 2(7). The relevance of a presumption is that until it is rebutted, it will taken to be the case. Accordingly, the director or connected person will have the burden of proof to show that such a loan is not repayable on demand and either does not carry interest or does not do so at the appropriate rate.

A loan or quasi-loan may, however, be in writing or partly in writing. In that event s 236(3) provides:

In relevant proceedings if the terms of the loan or quasi-loan are in writing or partially in writing but–

• (a) the case is one in which those terms are ambiguous with respect to the time at which, or the circumstances under which, the loan or quasi-loan is to be repaid, then it shall be presumed, until the contrary is proved, that the loan or quasi-loan is repayable on demand; or
• (b) the case is one in which those terms are ambiguous with respect to whether, or the extent to which, the loan or quasi-loan bears interest, then it shall be presumed, until the contrary is proved, that for any period before repayment of the amount of the loan or quasi-loan (or for any period before repayment of part of that amount) the amount or part has borne interest at the appropriate rate.

The effect of this subsection is that in the event of ambiguity in the terms of a loan or quasi-loan, in relevant proceedings there will be a presumption that the loan or quasi-loan is repayable on demand and bears interest at the appropriate rate. Where there is ambiguity in respect of both repayment and interest, both presumptions shall apply. 178 Section 236(6) gives some colour is give to what is meant by ‘ambiguity’ so that it includes cases where the written terms do not make provision in respect of the matter concerned and in which provision in respect of that matter is alleged to be made by those of the terms that are not in writing.