Loans to Directors: The Subsidiary Guarantee Grey Area

Section 185 restricts a company from advancing loans, giving guarantees, or providing security in connection with loans to directors and persons in whom directors are interested. Group financing therefore requires legal analysis even where the proposed support appears commercially routine.

A holding company may use the specific exemption for a loan, guarantee, or security in favour of its wholly-owned subsidiary, provided the funds are used for the subsidiary's principal business activities. The wholly-owned status should be checked strictly; "effective" or near-complete ownership may not be enough for this exemption.

However, Section 185 also separately permits a holding company to give a guarantee or provide security for a loan from a bank or financial institution to its subsidiary company, subject to the principal-business-use condition. Unlike the wholly-owned-subsidiary exemption, this provision can apply to a non-wholly-owned subsidiary, but only within its statutory terms.

Before signing a group guarantee, confirm the exact shareholding, lender type, transaction structure, use of proceeds, and applicable exemption. Also assess Section 186, borrowing and charge approvals, related-party implications, articles, shareholder arrangements, and financing covenants.

An incorrect exemption analysis is not reliably cured by a later resolution or a post-facto recharacterisation. The transaction may expose the company and relevant officers to consequences under the Act. A short ownership-and-purpose checklist before execution can prevent a major compliance failure.