Loans to directors: member approval under the Companies Act

A company may not lend money to one of its directors, or guarantee or secure a loan made to a director by someone else, unless its members have approved the transaction by resolution under section 197 of the Companies Act 2006. Quasi loans, credit transactions and loans to people connected with a director need the same approval only where the company is a public company or is associated with one. A set of exceptions removes the need for approval, the most used being loans of up to £10,000 in total and funding of up to £50,000 for company business expenditure.

Which transactions need the members’ approval?

Part 10, Chapter 4 of the Companies Act 2006 sets out the rules in sections 197 to 214. What is caught depends on the type of company.

• Every company, including a private company with one director: section 197 requires a members’ resolution before the company makes a loan to a director of the company or of its holding company, or gives a guarantee or provides security for a loan made by anyone else to such a director.
• A public company, or a company associated with a public company: section 198 adds quasi loans to directors, section 200 adds loans and quasi loans to persons connected with a director, and section 201 adds credit transactions for the benefit of a director or a connected person.
• Indirect routes: section 203 catches related arrangements, such as another person making the loan in return for a benefit from the company, or the company taking over a loan that would have needed approval.

Companies are associated under section 256 if one is a subsidiary of the other or both are subsidiaries of the same body corporate. The explanatory notes confirm the practical split: a private company not associated with a public company needs approval only for loans, and related guarantees or security, for its own directors and those of its holding company.

What counts as a loan, a quasi loan and a credit transaction?

A loan takes its ordinary meaning, and section 211 values it at the amount of the principal. A quasi loan, defined in section 199, is where the company pays a sum for the director, or reimburses expenditure incurred by someone else for the director, on terms that the director will reimburse the company or in circumstances giving rise to a liability to reimburse. A company credit card used for a director’s personal purchases, with the director expected to repay, is the classic case. Its value is the amount the director is liable to reimburse.

A credit transaction under section 202 is a hire purchase or conditional sale, a lease or hire of goods or property for periodical payments, or any other supply of goods, property or services where payment is deferred. It is valued at the price the company could reasonably expect to obtain in the ordinary course of business. A guarantee or security is valued at the amount guaranteed or secured, and if a value cannot be expressed as a specific sum it is deemed to exceed £50,000.

Connected persons are listed in section 252: family members as defined in section 253 (spouse or civil partner, a partner in an enduring family relationship, children and stepchildren, and parents), connected bodies corporate, and certain trustees and partners. A fellow director of the company is not treated as connected.

How is the approval given?

Section 197 does not say what kind of resolution is needed, so section 281(3) applies: an ordinary resolution, passed by a simple majority, unless the articles require more. A private company can use a written resolution or a general meeting.

Before the resolution is passed, a memorandum must be made available to members setting out the nature of the transaction, the amount of the loan and the purpose for which it is required, and the extent of the company’s liability under any connected transaction (section 197(3) and (4)). For a written resolution the memorandum goes to every eligible member at or before the time the resolution is sent. For a meeting it must be available for inspection at the registered office for not less than 15 days ending with the date of the meeting, and at the meeting itself.

Section 197 does not stop the borrowing director voting as a shareholder; that restriction belongs to ratification under section 239. Approval is not needed from the members of a body corporate that is not a UK registered company or is a wholly owned subsidiary (section 197(5)), so for a wholly owned subsidiary only the holding company’s members approve.

Which exceptions mean no approval is needed?

Exception	Section	Conditions
Expenditure on company business	204	Funds to meet expenditure for the purposes of the company or to let the director perform their duties properly. Aggregate value with other relevant transactions must not exceed £50,000.
Defending proceedings	205	Funding a director’s defence of criminal or civil proceedings alleging negligence, default, breach of duty or breach of trust in relation to the company, or an application for relief under section 1157. Must be repaid if the director is convicted, judgment goes against them or relief is refused, no later than the date that outcome becomes final.
Regulatory investigations	206	Funding a director’s defence in an investigation or proposed action by a regulatory authority on the same kinds of allegation.
Minor loans and quasi loans	207(1)	Aggregate value with other relevant transactions does not exceed £10,000.
Minor credit transactions	207(2)	Aggregate value does not exceed £15,000.
Credit in the ordinary course of business	207(3)	On terms no more favourable than for an unconnected person of the same financial standing.
Intra group transactions	208	Loans, quasi loans and credit transactions for an associated body corporate.
Money lending companies	209	In the ordinary course of business on arm’s length terms, with a relaxation for home loans offered on the same terms as to employees.

The thresholds are aggregate limits. Section 210 brings in “other relevant transactions or arrangements”: earlier or simultaneous transactions made under the same exception for the same director or a person connected with them, by the company or its subsidiaries. Under section 211(1)(b) an earlier transaction counts at its value reduced by anything the director has repaid.

What does this look like in practice?

Illustration only. Ash Ltd is a private company with two directors, Sam and Jo, who each own half the shares. In March the company lent Sam £8,000 under the £10,000 exception, and Sam has since repaid £2,000. In September Sam asks for a further £5,000 for personal reasons.

1. The new loan is personal, so the section 204 business expenditure exception does not apply.
2. For section 207(1), the earlier loan counts at £6,000 (£8,000 less £2,000 repaid). £6,000 plus £5,000 is £11,000, which exceeds £10,000.
3. Approval is therefore needed. The company circulates a written resolution to Sam and Jo with a memorandum stating that it is an unsecured loan of £5,000 for a personal purpose and that the company has no further liability under any connected transaction.
4. The resolution passes if members holding a simple majority of the total voting rights of eligible members agree (section 282(2)). Sam is entitled to vote.

What happens if approval is not obtained?

The 2006 Act replaced the old criminal prohibition with civil consequences. Under section 213 a transaction entered into in breach of sections 197, 198, 200, 201 or 203 is voidable at the instance of the company, unless restitution is no longer possible, the company has been indemnified for its loss, or avoidance would affect rights acquired in good faith by a third party without actual notice.

Whether or not it is avoided, the director concerned, any connected person who was party to it, and any other director who authorised it must account for any gain and are jointly and severally liable to indemnify the company for any loss, subject to defences for lack of knowledge and, for a director whose connected person borrowed, taking all reasonable steps. Section 214 lets the members affirm the transaction within a reasonable period, after which it can no longer be avoided under section 213, but the other liabilities in the general law and the director’s general duties under the Companies Act duties remain relevant.

How does this connect with the accounts and tax?

Section 413 requires the notes to the accounts to show advances and credits granted to directors and guarantees given on their behalf: the amount, an indication of the interest rate, the main conditions, and any amounts repaid, written off or waived, with totals. It covers every advance subsisting at any time in the year.

The company law approval is separate from the tax position. GOV.UK guidance says a record of money borrowed from or paid into the company must be kept, usually called a director’s loan account, and that the company may have to pay tax if the director is also a shareholder. See the director’s loan account explained and close company rules for the tax side, and directors’ tax responsibilities for the wider picture.

What are the common mistakes?

• Letting an overdrawn loan account build up past the £10,000 aggregate limit unnoticed.
• Treating personal spending as company business expenditure to stay within the £50,000 exception, and not keeping the signed resolution with the statutory records.
• Passing the resolution without the memorandum, or circulating it after the resolution has gone out.
• Forgetting holding company approval where the borrower is a director of the parent.
• Assuming a private company is outside sections 198 to 201 when it is in a group that includes a public company.

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Related Accountapedia entries

• Substantial property transactions with directors
• Indemnifying directors: what the law allows
• Payments for loss of office to directors
• Directors’ service contracts
• Ratifying a director’s breach of duty

Related cover: Directors and officers liability insurance and Management liability insurance.

Sources

• legislation.gov.uk: Act 2006 c. 46, section 197
• legislation.gov.uk: Act 2006 c. 46, section 198
• legislation.gov.uk: Act 2006 c. 46, section 199
• legislation.gov.uk: Act 2006 c. 46, section 200
• legislation.gov.uk: Act 2006 c. 46, section 201
• legislation.gov.uk: Act 2006 c. 46, section 202
• legislation.gov.uk: Act 2006 c. 46, section 203
• legislation.gov.uk: Act 2006 c. 46, section 204
• legislation.gov.uk: Act 2006 c. 46, section 205
• legislation.gov.uk: Act 2006 c. 46, section 206

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.