Can a company loan to its director?

Can a company loan to its director?

With the entire globe weathering COVID-19, directors may encounter hardship in obtaining a personal loan from the approved financial institution. The option to get a loan from a financial institution is always available in the market; however, the requirement and fulfilment to obtain the loan is getting difficult compared to the old times. Is there any alternative option available for directors? Can directors take a loan from the company?

General ruling on loan to directors

A company’s constitution may give the power to its board of directors to lend money; however, Section 224(1) of Companies Act (CA) 2016 generally prohibits a company from:

a) giving loans; or

b) securities for loans

to its directors and related companies as defined under Section 7 of CA2016.

Exceptions

However, there are circumstances that allow for a company to give loans or provide any security for loans to directors as accordance with Section 224 (2) with the below criteria:

1. foreign company;

2. exempt private company;

3. loan to the director whereby enable him to meet the expenses incurred for the purposes of the company or to ease him to perform his duties as an officer;

4. provide funds to the director (full-time employment with the company or its holding company) to meet his expenditure incurred in purchasing a house; and

5. loan to the director (full-time employment with the company or its holding company) by passing a resolution to approve the loan schemes by the members at the general meeting.

Section 224(3) of CA 2016 clearly stated that a company shall not authorise the making of any loan or securities for loans to the director unless obtained prior approval from the company on the resolution to disclose the purpose and the amount of the loan.

Last minutes remedy

What if the company authorised the loan without prior approval on the resolution? Any other remedies for this?

Yes, the company may authorise the making of loans or securities for loans to the director:

1. at or before the next following Annual General Meeting for a public company;

or

2. within six months from the making of the loan or securities for the loan to the director for a private company.

Contravention

What are the consequences of contravention of this section?

The company shall recover the loan and discharge the securities given in contravenes with this section.

Reference is made to a legal case Harta Empat Sdn Bhd v Koperasi Rakyat Bhd [1997] where the Court of Appeal decision that security created pursuant to a loan that contradicts with this Section was deemed invalid.

Referring to the Section 224(6), the directors will be jointly and severally liable to indemnify against any loss incurred. Upon conviction, a penalty will be imposed and be subject to imprisonment for a term not exceeding 5 years or a fine not exceeding RM3million or both according to Section 224(10) of CA2016.

Conclusion

In conclusion, it is clear that Section 224 of the Companies Act 2016 prohibits loans or providing securities to its directors unless there is a resolution approving such loan passed by its members. This section protects the company, its shareholder, and creditors as a precaution against any unlawful dilution of the company’s assets to the hands of directors or their related parties.

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SecKtp Ktploan to director, CA2016