Section 239 of The Companies Act provides that if a company makes a loan to a director of the company, its holding company or to a person connected with such director and the terms are not in writing there is a rebuttable presumption that  

(a) the loan is repayable on demand and 

(b) is interest-bearing at the ''appropriate rate”. “Appropriate rate” is defined as 5% or such other rate as may be specified by ministerial order. 

These terms are also presumed where the loan is in writing, but the terms of such loan are ambiguous.    The rationale behind this provision is to remind directors and shareholders that the company is a separate legal entity and that the company’s funds are not the funds of the shareholders or directors. Clients should be encouraged to document all new loans and, where possible, existing loans should also be put into writing. A point to note is where a company goes into insolvent liquidation with a loan or loans from directors, those directors will be creditors of the company and will rank pari passu with other creditors. It was felt that in some cases no such loans were made, or if advances were made, they were never intended to be repaid, hence the provision encouraging directors and companies to document such loans. Section 239 of the Act sets out the general prohibition on a company making a loan or quasi-loan to or entering into a credit transaction or guarantee or providing security for, a director or a person connected to a director. Exceptions to the general prohibition as follows: 

1. The value of the loan is less than 10% of the company’s net assets. Where the company’s net assets decrease and the loan comes to represent more than 10% of the company’s net assets, then the company and the director must take reasonable steps to reduce the balances outstanding to bring them below the 10% threshold. 
2. A Summary Approval Procedure (SAP) is carried out with regard to the prohibited arrangement. The SAP is a method provided for in the Act which validates otherwise prohibited transactions. In the case of transactions with directors prohibited by section 239, the SAP involves the making of a declaration by the directors of the company, containing certain information relating to the proposed transaction, and the passing of a special resolution of the members of the company approving the transaction. Significantly, the SAP does not require an auditor’s report.
3. The loan is with a member of the same group of companies. The provision refers to “anybody corporate” so that it now clearly extends to any holding company, subsidiary, or sister company, whether incorporated in Ireland or elsewhere. 
4. The loan is a reimbursement of the director’s expenses. 
5. The company enters into the transaction in the ordinary course of business and the value of the transaction is not greater nor the terms better than that which the company would offer ordinarily.