Personal Loan to Director/Shareholder (Exempt PTE LTD)

[nimblynimb]

Hi,

I have a query to make regarding Loans to Directors/Shareholders.

Background: My director who is also the shareholder would like to take out a personal loan from the company funds.

I understand that as per Sec 163 of Companies Act, a company is prohibited from making loans to a director unless the company is an EPC.

I have a loan request by one of the shareholders of at least S$500,000. The purpose of this loan was to purchase property but I would like to check with you on the legal and tax implications if I were to sign off on disbursing the loan amount.

My concern:

1) Loans to Director/Shareholder from an EPC is allowed in law. However, if it was loan made out to pursue personal interest (Eg. Purchase of property) of the Director, would this then be illegal as it goes against the Director's fiduciary duties as per the Company Act?

2) If I apply for capital financing with one of the financial institutions, the interest payment will be borne by the company. According to IRAS, the Director in whom this loan is for, will then have to pay income tax based on MAS's average prime lending rate since the loan is provided interest-free to him and categorized as 'Benefits relating to loans'. Is this still enforceable?

3) If I have reasonable grounds to believe that by disbursing the loan to the shareholder, even with the knowledge and authorization of the other shareholders, the company will go into a big deficit with the risk of being insolvent, is there any authority that I can consult to prevent the disbursement?

4) Lastly, let's say there's Shareholder A, Shareholder B, Shareholder C. If Shareholders A & B do not know of this loan disbursement, but Shareholder C who is the authorized signatory of the bank disbursed the loan to himself anyway, can shareholder C be liable to be sued and have his shareholding rights removed?

Hope you can advise me on this.

Thank you.

[Strong Eagle]

Hi,

I have a query to make regarding Loans to Directors/Shareholders.

Background: My director who is also the shareholder would like to take out a personal loan from the company funds.

I understand that as per Sec 163 of Companies Act, a company is prohibited from making loans to a director unless the company is an EPC.

I have a loan request by one of the shareholders of at least S$500,000. The purpose of this loan was to purchase property but I would like to check with you on the legal and tax implications if I were to sign off on disbursing the loan amount.

My concern:

1) Loans to Director/Shareholder from an EPC is allowed in law. However, if it was loan made out to pursue personal interest (Eg. Purchase of property) of the Director, would this then be illegal as it goes against the Director's fiduciary duties as per the Company Act?

2) If I apply for capital financing with one of the financial institutions, the interest payment will be borne by the company. According to IRAS, the Director in whom this loan is for, will then have to pay income tax based on MAS's average prime lending rate since the loan is provided interest-free to him and categorized as 'Benefits relating to loans'. Is this still enforceable?

3) If I have reasonable grounds to believe that by disbursing the loan to the shareholder, even with the knowledge and authorization of the other shareholders, the company will go into a big deficit with the risk of being insolvent, is there any authority that I can consult to prevent the disbursement?

4) Lastly, let's say there's Shareholder A, Shareholder B, Shareholder C. If Shareholders A & B do not know of this loan disbursement, but Shareholder C who is the authorized signatory of the bank disbursed the loan to himself anyway, can shareholder C be liable to be sued and have his shareholding rights removed?

Hope you can advise me on this.

Thank you.

You have a large mess. Questions in order to better answer.

a) Is your company an EPC?

b) Most of the time, it takes a directors resolution, approved by the shareholders at an AGM or EGM, to make this kind of disbursement. Has this happened? Or has this one director been granted the right to make these kind of disbursements via an earlier directors resolution?

c) Is the financing institution aware of the purpose of the funds they are lending?

[nimblynimb]

a) Is your company an EPC?

b) Most of the time, it takes a directors resolution, approved by the shareholders at an AGM or EGM, to make this kind of disbursement. Has this happened? Or has this one director been granted the right to make these kind of disbursements via an earlier directors resolution?

c) Is the financing institution aware of the purpose of the funds they are lending?

Hi Strong Eagle,

(a) Yes, it's an EPC.

(b) Based on the secretary file, there's no resolution for this type of disbursements, nor was there any approval on the disbursement voucher by the other shareholders.

(c) The financing institution only have knowledge that the funds will be used as working capital for operational expansion and not for the purchase of property.

[Strong Eagle]

Since you are an EPC, then you know that loans to directors are permitted, on the basis of the fact that small companies should be able to have more flexibility.

However, an EPC must still follow the other rules and regulations governing companies, and that includes placing before the shareholders at an AGM or EGM, any large transactions that would significantly affect the business. Consider this: Singapore law requires a directors resolution to open a bank account. Noting that I am not a lawyer, and I not giving you any legal advice, any CPA in Singapore would tell you that this loan could not be made without being passed at a shareholders meeting.

You asked if there is an "authority". Such authority rests in two places. The first, and ultimate authority, is the shareholders. Any two shareholders who own 10 percent or more of the stock, can force an EGM to be called to discuss any kind of company business, or if there are no capital shares, then 5 percent of the total members can call a meeting.

Therefore, and again, I am not an attorney, even if this loan were to be disbursed without a directors resolution, shareholders, by majority vote, and in proportion to the number of shares held, could override the loan, or prevent it from happening in the first place.

Second, the directors of the company have a fiduciary responsibility and can be sued by the shareholders, creditors, etc, if it is believed that the directors behaved recklessly. How many directors does your company have? You state that the loan risks making the company insolvent. Were that to be the actual case, then the directors could be sued for allowing this kind of risky transaction to happen.

Finally, from what you say, it seems that the loan from the bank is being obtained under false pretenses. This is considered to be fraud. The person(s) doing this could be criminally charged, and the lender could file civil suits for recovery of the money.

All in all, this doesn't look very good. You are suggesting that the other shareholders don't know of this action. You are suggesting that the company could go insolvent as a result of this action. You are suggesting that the bank will give the loan on false pretenses.

I don't know what your position is but I wouldn't touch this at all.

[Firixis]

Hi

I can across this post and is interested to know more about loans to directors.

Under what circumstances does an EPC have to charge interest on loan to directors?

Must there be a reason for extending this loan to the director?

Will there be any difference between loan to director from company's surplus funds vs EPC borrow from a financial institution and loan part of the amount to director.

Thank you.

[livingontheedge]

Under the Companies Act, the Company is allowed to extend loans to Directors who are gainfully employed in the Company’s ordinary course of business for the purposes of purchasing a home occupied or will be occupied by the said Director.

Yes – under the TP guidelines to adjust the interest on the monies lent, however, it will be restricted by the amount of interest expenses incurred and deductible.

All loans to the Directors have to be approved by the shareholders through a Director Resolution. At such meetings, it is in your duty and the Director, who is borrowing the funds, duty to the Company to bring this matter to the attention of the shareholders for resolution. Falling back on the principal of the duty to the Company, failing to comply with this duty and proceeding to extend the loan at the peril of the Company, will also be viewed as failure on the Company’s duty to other stakeholders such as creditors and employees in the event of liquidation, and under the Companies Act, the directors may be fined or imprisoned for such acts.

Yes – all loans needs to be approved by shareholders. Has to having his shareholding right removed – not sure. Plus – your Company only has one authorised signatory? Perhaps it’s about time to have two authorised signatories.

[livingontheedge]

Just to add, in the event the Director, who borrowed the funds, had not obtained the approval of the Company via a Director Resolution, but the loan is already lent, the loan would have to be repaid within 6 months by the Director.

I am curious - did the Bank inquire into or aware of the purpose of this loan? Such financing arrangements that are not within the Company's ordinary course of business and performed in the Company's best interests, will bring the Company's affairs under heavy scrutiny by the regulators, including the accusations of fraudulent and negligent behaviour on part of the Directors, which can be subjected to fines and imprisonment, not only on the Director who borrowed the funds, but also the Directors who are aware of this but approves the disbursement nonetheless.

My own experience of Loans to Directors are made from the Company's excess cash funds reserves, without having to go out to raise additional capital from the banks to relend to the Director, significantly deterioriating the Company's liquidity.

[nimblynimb]

I am curious - did the Bank inquire into or aware of the purpose of this loan?

The bank is only aware that the purpose of this loan was for company operational expansion and not for the purchase of property.

Nonetheless, thank you guys for the advice! I've consulted a lawyer separately and what he mentioned was pretty much the same as what you guys mentioned above.

[Strong Eagle]

I am curious - did the Bank inquire into or aware of the purpose of this loan?

The bank is only aware that the purpose of this loan was for company operational expansion and not for the purchase of property.

Nonetheless, thank you guys for the advice! I've consulted a lawyer separately and what he mentioned was pretty much the same as what you guys mentioned above.

Glad to hear that.