Loans to directors
Have you ever asked yourself whether company directors are entitled to hefty loans because of their big pay checks?
If you are a company director or if you are looking forward to become one, this article expounds on the various restrictions that must be at your fingertips before entering into a loan agreement.
Loans to Directors not Permitted
Generally, directors of companies in Singapore are not allowed to take a loan as stipulated under Section 162(1) of the Companies Act. This provision does not apply only to an exempt private company.
The following are the various restrictions surrounding the giving of loans to directors:
- A Singapore company or related corporation is prohibited from entering into a loan or quasi-loan contract with its directors;
- A Singapore company is prohibited from providing security or being a guarantor to a director who wants to enter into a loan or quasi-loan contract with a third party;
- A Singapore company is prohibited from becoming a creditor in a transaction that a relevant director benefits directly or indirectly; and
- A Singapore company is prohibited from providing security or being a guarantor in a credit transaction involving a third party in which a relevant director benefits directly or indirectly.
Since a director owes fiduciary duties to his/her company, he/she is not allowed to enter into any loan agreements with their company. Such arrangements are considered undesirable to the extent that even the spouse, child, adopted child or step-child are prohibited.
However, these prohibitions have certain exceptions, which are clearly stipulated under Section 162(2) and (3) of the Companies Act.
Where Loans to Directors Permitted
Apart from the situation above, companies are allowed to enter into a loan contract with its directors with the purpose of paying up for expenses already incurred or those projected to be incurred.
Below are the circumstances that can lead up to this:
- When a director is applying for a relief;
- When the director is a defendant in court in connection with any criminal or civil proceedings involving the company emanating from alleged gross negligence, breach of duty/trust or default;
- When the director is a defendant in an investigation conducted by a regulatory authority regarding any alleged gross negligence, breach of duty/trust or default; or
- When the director is a defendant against any action taken by a regulatory authority regarding any alleged gross negligence, breach of duty/trust or default.
Loans to Companies or Partnerships in which the Director is Interested
Generally, directors of companies in Singapore are not allowed to take a loan as stipulated under Section 163(1) of the Companies Act. This provision does not apply only to an exempt private company.
The following are the various restrictions surrounding the giving of loans to directors:
- A Singapore company or a limited liability partnership (LLP) is prohibited from entering into a loan or quasi-loan contract with its directors;
- A Singapore company or an LLP is prohibited from providing security or being a guarantor for a director who wants to enter into a loan or quasi-loan contract with a third party;
- A Singapore LLP is prohibited from becoming a creditor in a transaction that a relevant director benefits directly or indirectly; and
- A Singapore LLP is prohibited from providing security or being a guarantor in a credit transaction involving a third party in which a relevant director benefits directly or indirectly.
In addition, in cases where a director(s) of the first-mentioned company have at least 20% voting power in the other company or the limited liability partnership, they are required to refrain from voting in matters relating to taking loans or quasi-loans, entering into guarantees, making credit transactions, or security.
This provision can only be exempted if your company members approved the director(s) to take part in the voting process in general meeting, along with their family members.
Liability for Making an Unlawful Loan
It is important to note that in circumstances where a director enters into a loan contract or a guarantee or security, he/she violates Section 162(6) or 163(7) of the Companies Act. The courts will find authorising director guilty of an offence and force him/her to pay a fine of at least SGD$20,000 or a prison term not exceeding 2 years.
In addition, the director will be found guilty of breaching his/her fiduciary duties; therefore, in case of any losses incurred by the company, he/she would be legally responsible to reimburse the company.
Conclusion
Now that you have comprehensively learnt about loans to directors and connected persons, if you are a company owner or a shareholder in Singapore who needs further guidance, contact Tianlong Services today and we will take it up with you every step of the way.