{Acc Update} Loan Transactions and Financial Assistance for Directors: A Guide to Complying with Companies Act 2016

Navigating the Companies Act 2016 is essential for companies, when considering loans to directors and financial assistance. In this guide, we explore the nuances of these transactions, highlighting key provisions of the Companies Act 2016.

Whether you're an Exempt Private Company (EPC) or a Private Limited Company, understanding these regulations is vital for maintaining compliance and corporate integrity.

Loan to Directors

As per Section 224(1) of the Companies Act 2016, a company is prohibited from:

making a loan to a director of the company or a company deemed related under Section 7 of the Company Act 2016, or
entering into any guarantee or providing any security for a loan made to such a director by any other person.

Forms of Loan to Directors

There are three types of loans to directors:

Cash advances: Typically, short-term and repaid in lump sum.
Payment on behalf of the Director
Loan formalized in an agreement: Usually for the longer term and repaid by installments.

Guarantee

A guarantee is a contract to perform a promise or discharge the liability of a third person in case of default.

Example: If a director takes a loan from bank , the Company provides a corporate guarantee to the bank.

Security

Security is an asset pledged to guarantee loan repayment, satisfaction of an obligation, or compliance with an agreement.

Example: A director takes a loan from bank and Company allows a charge to be placed on its land in favor of the bank.

Approval Loans to Directors of Exempt Private Company (EPC)

Allowed for any purpose.
Board’s approval is required.
If the loan to the director/shareholder is interest-free, the Board must justify that this decision is in the Company’s best interest.
The loan must be repaid within 12 months.

Financial Assistance

According to Section 123(1) of the Company Act 2016, financial assistance given to any person to purchase existing company shares or to subscribe for new shares is prohibited.

Allowable Financial Assistance

For private or unlisted public companies, not exceeding 10% of shareholders’ funds, Shareholders’ Approval and Directors’ Solvency Statement are required.
Employee share option scheme (subscription of new shares) for the benefit of employees and executive directors.
Purchase of fully-paid shares, registered in the name of the employee or a nominee company.
Business nature exceptions:
a) Licensed money lenders
b) Asset management company registered with the Securities Commission

It is crucial to handle loan and financial assistance transactions carefully to ensure compliance with the Companies Act.

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