Which statement is true about loans from a company to a director?

Which statement is true about loans from a company to a director?

• A. They are allowed only if the requisite formalities are observed
• B. They are never allowed
• C. They require a special shareholder veto
• D. They are allowed freely

Answer: (A)

Loans from a company to a director aren’t automatic; they’re governed by formal rules to protect the company and its shareholders. The key idea is that such loans must be authorised by the members through the required shareholder approval before they can be made. This ensures that a related-party arrangement is reviewed and approved in a transparent way, rather than being decided solely by the board. If the company follows the proper process—seeking and obtaining the appropriate ordinary-resolution consent from shareholders—the loan can proceed. Without that approval or without meeting the formal requirements, the loan isn’t properly lawful, and the arrangement can be challenged or set aside. That’s why the correct view is that loans are allowed only if the requisite formalities are observed. They aren’t banned outright, nor are they automatically permitted without approval, and they don’t require a special veto—they require shareholder approval and proper process.

Loans from a company to a director aren’t automatic; they’re governed by formal rules to protect the company and its shareholders. The key idea is that such loans must be authorised by the members through the required shareholder approval before they can be made. This ensures that a related-party arrangement is reviewed and approved in a transparent way, rather than being decided solely by the board.

If the company follows the proper process—seeking and obtaining the appropriate ordinary-resolution consent from shareholders—the loan can proceed. Without that approval or without meeting the formal requirements, the loan isn’t properly lawful, and the arrangement can be challenged or set aside.

That’s why the correct view is that loans are allowed only if the requisite formalities are observed. They aren’t banned outright, nor are they automatically permitted without approval, and they don’t require a special veto—they require shareholder approval and proper process.