Your recent development from partnership to private limited company does indeed bring about significant changes to the duties that you must abide by. Unlike the role of a partner, a director is bound by the statutory duties defined in the Companies Act 2006 (“CA 2006”). These duties are much more definitive and extensive than those of a partner.
Ordinarily, as a director, you are under a duty to act in the best interests of the company and its shareholders. Firstly, I note that the director’s have said that they do not wish to take up work with faith organisations, however you must bear in mind the future implications of taking this element into your proposed sole trade venture. SGL may consider taking up this area of work in the near future when there is less commercial work available and you must therefore consider the likely consequences and impact of running your proposed sole trade venture alongside your directorship held with SGL. You would not ultimately be promoting the success of SGL if you were in direct competition with your proposed venture.
Secondly, Phil’s concerns regarding the director’s loan needs to be addressed. His concerns may foster from your want for a director’s loan as opposed to an independent bank loan. The bank’s interest rate is 0.2% lower than your offering to SGL and you therefore need to establish why you are favouring a loan from SGL. There may be some concern as to your financial position and this may therefore impact on you, and the other directors, acting in the best interests of the company by allowing the company to take on a financial risk with you as a debtor. I would recommend that you clarify your financial position with the directors and establish why you are seeking a loan from SGL. It could also be argued that you would not be promoting the success of SGL by requesting a loan to fund your sole trade venture that supplies the same service as SGL but in a different sector. However, given that you have agreed to pay a greater interest rate than that of the bank and have confirmed you will pay back the loan within the course of this year, it could be argued that you have exercised reasonable care and consideration of SGL by allowing them a short term financial benefit.
Further, you have a duty to avoid conflicts of interest and this requires you to act upon situations where there is a reasonable prospect of conflict. This applies in particular to the exploitation of any property, information or opportunity. Given that your proposal is to establish a business that undertakes work within the same industry sector as SGL, your duty would be tainted by using SGL’s loan to fund the business and using your position as director of SGL in securing the faith organisation opportunity. You therefore have a duty to declare your interest and ensure that the directors have full disclosure of a possible conflict of interest before deciding whether to enter into the arrangement and officially grant you consent to found your venture. Given that you have made a disclosure to the directors of SGL already, who have unanimously consented to you exploring this new venture, you should not have any issues but a full declaration must be made before the company to comply with your duties. To do this you may make your declaration at a director’s board meeting or make your declaration by notice to the directors in writing, which can be done outside of the board meeting.
Company loan
Companies were previously unable to make loans above £5,000 to directors under the previous Companies Act (Companies Act 1985), and this could well be where Phil was getting confused. This prohibition, however, has since been removed. With the introduction of the new general prohibition in the CA 2006, a company is able to make a loan to a director.
As you are requesting a loan of £25,000, you fall outside of the exemptions present in the CA 2006 and shareholder approval is required to approve the loan. You would not, however, require shareholder approval for a loan falling below the value of £10,000. The consequence of contravention of the above requirement to pass an ordinary resolution is that the arrangement would be voidable by SGL. You must therefore ensure that you comply with the statutory requirements of a general meeting and ordinary resolution set out below.
Before the approval is given by your fellow shareholders, a memorandum must be drawn up setting out and establishing: the nature of the transaction, the amount of the loan, the purpose of the loan and the extent of the company’s liability under any transaction connected with the loan (the “Memorandum”). In order to comply with your statutory requirements under the CA 2006, you must ensure that the Memorandum is made available prior to the general meeting of shareholders and at SGL’s registered office not less than 15 days ending on the day of that general meeting.
General meeting
Before holding the general meeting (“GM”), you must circulate the Memorandum with the terms of the loan and make it available for inspection at SGL’s registered office at least 15 days before the GM. You should then provide Victor and Phil with reasonable notice to hold a general meeting (“GM”) after which a quorum must be established. Quorum is the minimum number of shareholders who are required to attend the GM in order for the ordinary resolution to be passed validly, which will be two shareholders. As a director, Alex is also permitted to attend the GM but cannot vote. Given that SGL has three shareholders, at least two must attend but I presume all will be in attendance given the nature of the proposed arrangement.
As SGL has disapplied Model Article 14 in the Articles of Association, which relates to conflicts of interest, you are entitled to be counted as participating in the decision-making process for quorum and voting purposes provided you have made a declaration of your personal interest in the proposed arrangement. I would recommend that you declare your interest again at the beginning of the GM and note that you have considered your duty to act in the best interests of the company.
During the GM, both yourself, Victor and Phil will need to discuss your proposals with regards to the issue of the company loan and the terms established in the Memorandum. It is worth noting that if there is no Memorandum present at the GM then there can be no valid resolution.
The ordinary resolution is passed by simple majority of the shareholders voting at the GM in favour of it. Thus, the resolution to advance a £25,000 loan to you will be passed if, on a show of hands, a majority of the shareholders present vote for the resolution. As I understand it Victor is happy to vote in favour of the loan, however Phil is not. Given SGL’s disapplication of Model Article 14, you would be able to pass the ordinary resolution if you vote in favour with Victor. Phil could demand a poll vote considering he is a shareholder with more than 10% shareholding, however this is unlikely to affect the overall outcome of the vote as both yourself and Victor cumulatively hold 74% of the voting rights in SGL and can override Phil’s vote.
Upon resolving to advance the loan of £25,000, a copy of the ordinary resolution should be signed and posted to Companies House along with Form MR01 and the required fee being £23. These documents should be submitted to Companies House within 21 days of the GM being held. It is also worth noting that it is possible to file the documents online which is considerably easier and quicker at a cost of £15.
Summary
Under the general prohibitions of the Companies Act you will be able to secure a director’s loan from SGL provided that the shareholders of SGL pass an ordinary resolution with simple majority, being 50% or greater. This will require at least Victor and yourself to resolve to advance the loan of £25,000. Given that you have a direct interest in the proposed arrangement, you have a duty to declare your interest to the company which should be done in writing to all of the directors prior to the GM, and at the beginning of the GM. If there are no objections to you using the information obtained about the faith organisations opportunity, which arose as a result of you being a director of SGL, you will not breach your duty to avoid a conflict of interest. You must also establish and consider your duty to promote the success of the company and act in the best interests of the company. Given that the loan you require is a short term financial benefit for SGL, it is unlikely that you will breach your duties as your fellow directors have upheld your proposals.
Next steps
As a first step you will need to consider your duties owed to SGL and declare your understanding to the directors. It is then necessary to call the GM to resolve to advance a loan of £25,000 to you and confirm that there are no objections to your conflict of interest in founding the sole trade venture.
Should you need any assistance in drafting the necessary documents required for the GM or for filing at Companies House please let me know and I can arrange this.
In the meantime, should you need any further advice please do not hesitate to telephone me.