Event

Loans to Directors and Shareholders

  • April 16, 2020

In general, directors are not allowed to borrow from the company. However, it is possible to achieve this if proper rules are followed to ensure proper corporate governance.

 

1. Director Loan

There are many reasons why directors want to obtain loans from the company.

One situation is that directors need funds to conduct business on behalf of the company. This may be an attractive option. Relative to a tight loan market, bank may charge higher interest rates. If there is excess cash in the company, applying for a loan from the company can reduce the interest rate.

 

  • Loan Restrictions

However, in general, companies are not allowed to issue loans to their directors or directors of affiliated companies. Affiliated companies refer to companies belonging to the same group, such as holding companies or subsidiaries.

This general rule applies not only to standard loan agreements, but also to

  • Quasi-loan
  • Credit transaction
  • Guarantee for the benefit of the relevant director

A quasi-loan is a transaction in which the company agrees to pay a sum caused by a director or related director, provided that the director or related director is required to repay or repay the company.

Credit transactions include the following transactions:

  • Supply goods or dispose of real property under an instalment purchase agreement or conditional sale agreement;
  • Lease or lease real estate or goods in exchange for periodic payments;
  • Otherwise, real property, supplies, goods or labour services should be disposed of, but there is an understanding that payment should be deferred.

Guarantees include companies providing guarantees or guarantees for a loan, quasi-loan or credit transaction, which are carried out by or for the benefit of the director.

 

  • Director-Related Personnel

The company’s restrictions on issuing loans to directors and related directors also apply to the relevant personnel of these directors. According to Singapore’s “Company Law”, there are two types of related personnel.

The first category is the director’s family members, including the director’s spouse, children (including adopted children) and step-children. In other words, the family members of these directors are generally not allowed to obtain loans from the director’s company.

The second type is that the  company is not an exempt private company, and its directors have 20% or more of the voting rights in the receiving company or limited liability partnership. An exempted private company refers to a company with fewer than 20 members, and the company does not have any beneficial interest in its shares.

In this case, the borrowing company or limited liability partnership will also be regarded as a relevant person. Any loans between these entities require the company’s approval at the shareholders ’meeting in advance.

To determine whether the director’s necessary interest in the company ’s borrowing triggers the restrictions of the Company Law, the interests of the director ’s family members are regarded as the director ’s interest. This means that even if the director does not have a 20% or more voting interest in the borrowing company, if the director’s family members accumulate such an interest, the loan still needs to be approved in advance.

 

2. Exceptions to Loan Restrictions

There are many exceptions to the general rule. In the following cases, loans may be issued to the relevant directors:

  • Provide loans to the relevant directors to cover the expenses incurred by the directors for the company, or allow the directors to properly perform their duties as directors.
  • If the director is employed by the company or the related company, and the loan is to buy a residence for the director for his residence, and there are no more than one outstanding transaction.
  • If the director in question is employed by the company or the company concerned, the loan is issued in accordance with a plan to benefit employees. And, this plan must be approved at the shareholders’ meeting.
  • The daily business of the company includes loans, and the loans are issued to the relevant directors in the daily business. The company’s activities must also be regulated by written laws related to banking, finance or insurance, or by the Monetary Authority of Singapore.

In addition, the exempted loan company may issue loans to the loan company even if the director of the loan company holds 20% or more of the voting company’s voting interest.

 

  • What happens if these restrictions are violated?

Any director who violates the permitted exceptions and approval requirements because of loan approval is an offence. The director can be fined up to S $ 20,000 or imprisoned for 2 years.

 

3. How to get loan approval

If the loan meets the exceptions to the first two provisions, the company must obtain approval for the loan at the general meeting of shareholders. At this meeting, the purpose and amount of the loan must be made public.

In addition, the loan must be made under the following conditions, that is, if it is not approved at or before the next general meeting, the transaction amount will be repaid within 6 months after the end of the general meeting. Directors authorized to issue loans are also jointly and severally liable to compensate the company for the losses suffered by the loans.

Any transaction involving a company in which the directors have at least 20% of the voting rights and interests is approved as long as the company has been approved at the general meeting of shareholders.

 

4. Corporate loan interest rates and tax implications

There is no legal requirement for the interest of the company on loans to its directors or related persons. Therefore, such loans may be interest-free or subsidized (if a third party pays interest on the loan).

However, these loans may be taxable. According to the income tax law, company directors are considered to be employees of the company. Therefore, any benefits obtained from company loans are regarded as employment benefits if they are obtained as company directors. Therefore, interest income should be taxed in the same way as employment benefits.

The amount of interest income can be determined by multiplying the amount of outstanding loans on December 31 of each year by the average preferential loan rate for that year.

However, if the director is also a shareholder and the loan is provided to the director as a shareholder (rather than as a director), any interest benefits will not be an employment benefit, so no tax is required.


Shareholder VS Director

Company directors or shareholders loans as a shareholder or to the identity of directors issued, as the case may be. The following factors need to be considered:

  • There are legitimate, non-tax reasons for it to exist in the form of loans rather than dividends.
  • There must be evidence of a true intention to establish a debtor / creditor relationship and reasonable expectations that the loan will be repaid. This can be demonstrated by the repayment schedule in the loan agreement.
  • There are loans to other shareholders with similar terms and amounts. The amount should not depend on the borrower’s position in the company.
  • There is written evidence that the loan was provided to the borrower as a shareholder. It can be meeting minutes, director resolutions, etc.

 

  • Directors’ responsibilities and benefits disclosure

Directors have a legal obligation to disclose any direct or indirect interests they have in any transaction or proposed transaction with the company. This will include any loans obtained by the directors or related personnel of the company from the company.

The nature of this interest must be disclosed at the board meeting. In addition, a note must be sent to the company detailing the nature and scope. Directors must take these steps as soon as practicable after they become aware of the relevant benefits.

Directors also have the legal obligation to act honestly and reasonably and diligently when performing their duties. Directors may not use their positions or the knowledge gained from their positions to benefit themselves or others or cause damage to the company.

For example, when a director decides to sign a loan agreement with the company, he must be confident that the loan will not cause damage to the company.

If the director is found to have inappropriately borrowed money from the company and violated his obligation of good faith, he will be responsible for the profit or loss suffered by the company due to his wrongdoing. In addition, he or she will face a fine of up to S $ 5,000 or imprisonment of up to 12 months.

 

  • Shareholder loan from company

The company has no legal restrictions on providing loans to shareholders. Whether or not the company allows loans to shareholders is subject to the decision of the board of directors. When deciding whether or not to provide loans to shareholders, directors must ensure that they perform their duties as directors.

If the shareholder makes a loan to the company, interest is not taxable.

 

  • Directors or shareholders lend money to the company

It is extremely common for companies to obtain loans from directors or shareholders, especially in the early stages of startups.

Unlike the many problems of directors and shareholders lending to companies, lending to companies is relatively simple.

The loan only needs to be approved by the board of directors. In addition, such loan agreements may not contain extensive statements, and these statements are usually made by the borrower to encourage the lender to join the agreement.

 

  • Examples of such manifestations may include statements such as:
  • The borrower is capable of fulfilling its obligations under this agreement.
  • All financial information related to the lender’s assessment of whether he wishes to become a creditor has been provided and is accurate.

One reason that such a loan agreement may be simpler is that the lender, as a company’s shareholder or director, usually wants to be in a better position to understand the company’s financial situation.

For example, the Company Law authorizes them to view the company’s financial statements and may also understand the company’s future business plans. Therefore, they may not need too many statements from the company to urge them to join the agreement.

The interest rate of loans provided by directors or shareholders to the company is generally determined through consultation based on the relationship between the director or shareholders and the company, and may even be interest-free.