‘Directors’ Loans’

For inclusion in In Practice Ireland’s FAQs

Question

I have recently commenced the audit of a small company client and have noticed that the directors’ loan account balance exceeds 10% of the net assets of the company. Do I automatically have to report this to the ODCE as a suspected indictable offence?

Answer

Section 31 of the Companies Act, 1990 introduced a general prohibition on the granting of loans by companies to directors. However, the 1990 Act also provides a number of exemptions from the general prohibition. The most commonly availed of exemption is that set out in section 32, whereby a loan can be given to a director by a company provided that the value of the loan does not exceed 10% of the company’s ‘relevant’ assets.

The company’s relevant assets are defined by section 29 as being:

  • the net assets as per the last preceding balance sheet to have been laid before an AGM of the company, or
  • where there is no such balance sheet, the company’s called up share capital.

It is therefore necessary to establish the value of the relevant assets and whether the loan balance exceeds 10% of the relevant assets. If so, the auditor must go on to consider whether the breach constitutes a suspected indictable offence.

Section 40 of the 1990 Act creates the indictable offence in relation to directors’ loans. It states ‘An officer of a company who authorises or permits the company to enter into a transaction or arrangement knowing or having reasonable cause to believe that the company was thereby contravening section 31 shall be guilty of an offence’.

It will therefore be necessary for the auditor to form an opinion as to whether in his/her opinion the director(s) authorising or permitting the transaction knew or had reasonable cause to believe that the company was thereby contravening section 31. While this is a matter of opinion, in forming their opinion auditors would be expected to, inter alia:

  • discuss the matter with the director(s), and
  • review all relevant correspondence and documents that might pertain to the matter including, for example, previous management letters and replies thereto and letters of representation.

In forming their opinion, auditors will also have to assessthe director(s)’ bona fides in this regard.

In the context of the foregoing, it is worth noting that, in his recently published Consultation Paper on the subject of Transactions with Directors (ODCE Consultation Paper C/2003/2), the Director set out his position as follows:

“the question of whether:

·an officer authorising or permitting a transaction, or;

·a person procuring a company to enter into a transaction

knew or ought to have had reasonable cause to believe that the company was contravening section 31 is a matter upon which only the Courts are competent to adjudicate. Accordingly, the Director is of the view that, in situations where auditors form the opinion that there are reasonable grounds for believing that there has been a breach of section 31, the matter should be reported to the ODCE”. (section 7.1).

Where an auditor forms the opinion that the director(s) did authorise or permit the transaction knowing or having reasonable cause to believe that the company was thereby contravening section 31, the matter must be reported to the ODCE immediately. Failure to report is itself an indictable offence. Moreover, where an ACCA monitoring visit subsequently detects a failure to report, in addition to the disciplinary consequences, ACCA may be required to report the matter to the ODCE.

Where an auditor forms the opinion that the director(s) did not authorise or permit the transaction knowing or having reasonable cause to believe that the company was thereby contravening section 31, that opinion should be fully documented in the auditor’s working papers and should be capable of being justified subsequently should the need arise e.g. in the context of an ACCA Monitoring Visit or where the ODCE challenges that decision on the basis of other information available to it.

Irrespective of whether the auditor forms an opinion that the director(s) authorised the transaction knowing or having reasonable cause to believe that the company would thereby be contravening section 31, upon becoming aware of the suspected breach in the first instance i.e. by virtue of the fact that the loan balance exceeded 10% of the company’s relevant assets, the auditor’s obligations under SAS 120 are activated.

In particular, SAS 120.6 requires ‘When the auditors become aware of or suspect that there may be non-compliance with law or regulations, they should document their findings and, subject to any requirement to report them to a third party, discuss them with the appropriate level of management’. Given the nature of the subject matter, the appropriate level of management will generally be the company’s directors.

In the context of reporting non-compliance with law or regulations, SAS 120.8 goes on to require that ‘The auditors should, as soon as practicable (save where SAS 120.15 applies), either (a) communicate with management, the board or the audit committee, or (b) obtain evidence that they are appropriately informed, regarding any suspected or actual non-compliance with law or regulations that comes to auditors’ attention’. SAS 120.9 further provides that ‘If, in the auditors’ judgement, the suspected or actual non-compliance is material or is believed to be intentional, the auditors should communicate the finding without delay’. Given that a loan exceeding 10% of the company’s net assets it is likely to be material, the matter will require immediate communication to the directors.

Clearly, any further amounts drawn down by a director subsequent to having been informed of the breach pursuant to SAS 120 (or otherwise) are done so knowingly and therefore there is no question that they are reportable to the ODCE. It should be further noted that each additional drawdown is potentially a separate offence.

It goes without saying that auditors should ensure that the requirements of SAS 120 are fully complied with as failure to adhere to auditing standards is a disciplinary matter, potentially having serious consequences.

The aforementioned ODCE Consultation Paper contains a comprehensive guide to the law relating to directors’ loans and other transactions with directors and is available from the ODCE website ( In addition to providing a commentary on the provisions of the legislation, the guidance also includes illustrative examples and deals with the disclosure requirements of the Companies Acts and relevant accounting standards.

Ian Drennan FCCA CPA is Corporate Compliance Manager with the ODCE