Loans Between a Company and Its Directors

A director loan account in Mauritius is the running record of what a company owes its director, or what the director owes the company. It is not a special legal product. It is an ordinary ledger account in the company's books, and it becomes important the moment money moves between the two without being salary, a dividend or an expense refund.

This guide covers loans in both directions, the approvals that protect the board, the entries that keep the account clean, and the tax questions that come with it. It gives general information only: whether a particular loan is permitted depends on the company's constitution, its licence and the facts, so a conclusion for your own case needs a conclusion from an adviser.

Two directions, two different risk profiles

The same account can swing either way over a year. The risks differ, so it helps to separate them.

The company lends to a director

A loan to a director of a Mauritius company is the sensitive direction. Company money leaves the business for the benefit of one person who also helps decide how the business is run. Creditors, minority shareholders and the tax authority all have an interest in seeing that it is properly authorised, documented and repaid.

The director lends to the company

A director, or a shareholder, often funds a young company from personal savings. A shareholder loan in Mauritius of this kind is common and generally easier to defend, because the company receives money rather than giving it away. It still needs a paper trail, since an undocumented transfer can later be argued to be share capital, a gift or something else entirely.

When can a company lend to its director?

There is no single yes-or-no answer. Four filters apply, and a loan has to clear all of them.

1. The constitution. Some constitutions limit or require specific approval for transactions with directors. Read it before anything else.
2. Company law. The Companies Act 2001 sets the framework for directors' duties and for transactions in which a director is personally interested. The directors' duties guide explains the duty to act in the company's interests, which a loan on poor terms can breach.
3. Financial capacity. A company that cannot comfortably meet its debts should not be lending money out. The solvency test is the discipline the board applies before any transfer that weakens the balance sheet.
4. Licence and regulatory status. A company holding a licence, or administered by a FSC-licensed corporate service provider (Management Licence), may face additional expectations on how funds are used. Ask your provider before lending.

The interested director does not decide alone. The general treatment of interests is covered in the conflict of interest guide, and this page focuses on the loan mechanics rather than repeating it.

Approvals: what a sound process looks like

Whatever the legal minimum, a prudent process leaves a record that a later reader can follow. Unlike a casual transfer, a proper loan is decided and written down before the money moves.

The decision is minuted. If the board acts by signing instead of meeting, a written resolution does the same job; see board and written resolutions for the form. The minutes guide shows how to record the declaration of interest and the reasoning.

The loan agreement

A short written agreement removes most later disputes. It should state:

• the parties and the date;
• the principal and the currency;
• whether interest is charged and at what rate, set at a level the board can justify;
• the repayment schedule or a repayment on demand;
• whether the loan is secured;
• what happens if the borrower defaults.

A loan from a director should say whether it ranks behind other creditors. A loan to a director should say whether it is repayable on demand or on a fixed date. Leaving this open invites a dispute with a liquidator or a tax inspector.

Bookkeeping: how the account works

The director loan account is a single ledger account per director. Every movement is posted to it, and its balance shows who owes whom.

Three habits keep the account reliable:

• One account per director, never a mixed account for several people.
• Supporting evidence for every entry: invoice, bank line or board decision. The bookkeeping requirements set what the company must retain.
• A reconciliation at each year end, so that the balance in the annual financial statements matches the agreement and the bank.

An overdrawn account, where the director owes the company, is shown as an asset of the company, usually under receivables. An account in credit is a liability. Auditors and tax inspectors look at both, and a balance that never moves for years invites questions.

Choosing the right route: loan, pay or distribute

Many "loans" are really something else in disguise. Before booking a transfer to a director, decide what it actually is.

For pay, the director remuneration guide explains the proper channels. For profit distributions, see paying a dividend. A loan that is never meant to be repaid risks being recharacterised as one of these, with the consequences that follow.

Tax points to check

Tax treatment depends on the facts, so treat the following as questions to put to an adviser, not as conclusions.

• Interest paid by the company. Whether interest on a director's loan is deductible depends on the general rules for business expenses. The deductible expenses guide sets out the approach: the cost must relate to producing income, and the terms should be commercial.
• Interest paid abroad. If the lender is not resident in Mauritius, payments of interest may fall under the rules in the withholding tax guide. A director living abroad lending to a Mauritius company is a common case.
• Interest-free or low-interest loans to a director. The tax authority may look at whether the arrangement gives the director a benefit. Whether it does depends on the terms and the director's status.
• Loans never repaid. A balance written off, or forgiven, may be treated differently from a normal commercial loss, and may have consequences for the director personally.
• Tax residence of the company. A company is resident for tax purposes in Mauritius if it is incorporated here or if its central management and control are here. Where a company is run from abroad, the place where loan decisions are taken can matter to that analysis.

Disclosure in the accounts

Balances with directors are related party transactions, so they normally need disclosure in the notes to the accounts. A reader should be able to see the amount outstanding, the terms and whether any amount has been written off. The IFRS for SMEs guide is the usual reference for private companies. Hiding a director balance inside a general "other receivables" line is a common weakness and is easy to avoid.

Directors' personal exposure

A director who approves a loan that harms the company, or that the company cannot afford, may be personally answerable. The company, a liquidator or a shareholder may later challenge the transaction. This is why a documented, minuted and priced loan is better than a handshake: it shows the board acted in good faith and in the company's interest.

Checklist before moving any money

• Constitution read and no restriction found
• Interest declared by the director concerned
• Board decision minuted or written resolution signed
• Solvency considered where the company is the lender
• Written loan agreement with amount, rate and repayment terms
• Entry posted to the director's own loan account
• Supporting bank evidence filed
• Tax treatment of interest reviewed
• Balance disclosed in the year-end accounts