Can Directors And Shareholders Obtain A Loan From The Company?

A director or shareholder may obtain a loan from the company, but not without certain restrictions. In general, a director cannot do so. But there are circumstances that a director or shareholder may do so if there is compliance with certain rules, to ensure corporate governance is in place.

Directors (and Related Persons) obtaining loans from Company

There can be a variety of reasons why a director may need to obtain a loan from his or her company. One common reason is that the director requires funding to carry out businesses on behalf of the company.

Restrictions on loans

As mentioned, the general rule is a company cannot make any loans to its director, or a director of related companies. Related companies refer to companies belonging to the same group i.e. holding or subsidiary companies.

The rule covers not only standard loan agreements but all credit transactions, guarantees, and quasi-loans made for the benefit of a relevant director.

A quasi-loan is whereby the company agrees to pay a debt incurred by a director or a director of a related company, based on the agreement that he or she will repay the company.

Credit transactions are where the company would do one of the following:

• disposal of immovable property or supply goods under the hire-purchase structure or conditional sale agreement
• lease or hire goods or immovable property in exchange for a periodic payment, or
• disposal of immovable property, goods or services based on understanding that payment will be deferred

Guarantees refer to the company providing security for a loan, quasi-loan, or credit transaction made by a director, for the benefit of a director.

Related persons under the Companies Act (CA)

The restrictions on obtaining loans from a company by directors apply to the directors’ related persons as well. The CA defines two types of related persons.

• The director’s family members, including the spouse, children (adopted as well), and step-children. They are generally cannot obtain any loans from the director’s company
• When the lending company is not an exempt private company, and the director has twenty per cent (20%) voting rights or more in the company or limited liability partnership (LLP) that takes up the loan. An exempt private company has no more than 20 shareholders and no companies have a beneficial interest in the shares.

In this situation, the borrowing company or LLP is a related person. Any loans between the entities need prior approval in a general meeting from the company that is lending. The director that is borrowing, and all his family members, will have to abstain from voting on the matter.

To determine whether a director has sufficient interest in the company that is obtaining the loan to trigger restrictions in the CA, the interests of the director’s family members are one and the same as the director’s interests. What this means essentially is that even if the director doesn’t have a twenty per cent (20%) or more voting interest in the company that is obtaining the loan, prior approval is still necessary if the family members have a cumulative interest.

Exceptions

Loans made to a director is possible under some exceptions.

1. For the purpose of an expenditure, a director has incurred for the course of business, or to fulfil his duties as a director.
2. The loan is for the purpose of purchase or leasing a home for the director to live in, where he or she is a full-time employee of the company or related company. There must not be more than one such outstanding transaction.
3. The loan is given as a scheme to benefit employees, whereby the director is a full-time employee of the company or related company, and the scheme has been approved prior to a general meeting.
4. If the company is in the business of lending money, and the loan is given to the director as an ordinary course of business. However, the company’s activities must be regulated by the Monetary Authority of Singapore (MAS), and laws related to banking and finance.

Additionally, lending companies that are exempt private companies can provide loans to the borrowing company, even when the director of the lending company has twenty per cent (20%) or more voting interest in the company that is obtaining the loan.

How to obtain approval for the loan

When the loan falls under any of the first two exceptions stated, it must obtain approval from the company during a general meeting. The purpose and amount must be fully disclosed.

If the loan has been made without obtaining approval at or before the next Annual General Meeting (AGM), the loan amount must be repaid within six (6) months from the conclusion of AGM. All directors who authorised the loan shall be jointly and severally liable for any losses arising from the loan made, indemnifying the company.

Loans involving a company where the director has at least twenty per cent (20%) voting interest, will be permitted so long as approval is given in a general meeting. However, the concerning director and his or her family members have to abstain from voting.

Penalty for breaching restrictions

Any director who authorises the loan in breach of allowed exceptions and the requirements of approval shall be guilty of an offence. He or she will be liable for a fine of up to Singapore Dollars (SGD) $20,000 or imprisonment of up to two (2) years.

Interests and taxes

The law does not provide for any interests payable for the loan by a company to its directors or related persons. As such, loans can be interest-free or subsidised. Having said that, taxes may apply to these loans. Under the income tax law, directors are employees of the company. Therefore, any benefits that are derived from the company loan, is an employment benefit since the loan was obtained in the director’s capacity. Interest benefits will be taxed underemployment benefits.

The value of interest benefit is determined by multiplying the average prime lending rate for that particular year, by the outstanding loan as of 31 December of the same year. If the director is also a shareholder, the loan given to the director in the capacity as a shareholder (rather than in the capacity of a director), the interest benefits will not be taxable as they are not employment benefits.

How a loan is determined to be obtained in a shareholder’s or director’s capacity, depends on the facts during which the loan is obtained. Some of these are:

• Sufficient non-tax reasons for it to be given as a loan rather than dividends.
• A repayment schedule in the form of a loan agreement and reasonable evidence that the loan will be repaid.
• Presence of loans offered to other members of similar amounts and terms.
• Documentary evidence such as minutes of meetings, directors’ resolutions

Directors’ duties and interests disclosure

Directors are bound by a statutory duty to disclose any direct or indirect interests that they have, in any transactions with the company, including loans obtained from the company by the director or related persons. It must be disclosed at a directors’ meeting. A notice must be sent to the company on the nature and extent of this interest. The director has to take reasonable steps as soon as he or she is aware of this interest.

When a director obtains a loan from the company, he or she must genuinely believe that it will not cause significant harm to the company. Because directors have a duty to act in an honest manner and be diligent in their duties. They must not abuse their position and knowledge obtained by reason of their positions in the company to obtain benefits for themselves or others, or cause harm to the company.

If a director is guilty of breaching his statutory duty, he or she will be liable for any profit made or loss suffered by the company. He or she also faces a fine of up to SGD $5,000 or imprisonment of up to twelve (12) months.

Shareholders obtaining loans from Company

There are no legal implications regarding a shareholder obtaining a loan from the company, due to the fact that a shareholder does not share the same duties and responsibilities to the company, as compared to a director. It is for the board of directors to decide to proceed with the loan or not. The directors have to act according to their duties as a director as mentioned above.

Company obtaining loans from Directors and Shareholders

Companies wanting to obtain a loan from directors and shareholders are fairly common especially in the early stages of companies. The process is fairly straightforward, unlike the vice versa scenario. The loan agreements need not contain comprehensive representations made by the borrower to the lender. Approval needs only to be given by the board of directors.

The reason why such agreements can be simpler is that as a shareholder or director of the company, he or she is fully aware of the company’s financial situation. He or she will be in a good position to know about it.

Under the Companies Act, they have access to the company’s financial statements. So extensive representations from the company to obtain a loan from its shareholders and directors are unnecessary. Any loans given by the members or directors can be interest-free as well.

If you are unsure as to how you can obtain a loan from your own company, feel free to contact us.

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