You have a large mess. Questions in order to better answer.nimblynimb wrote: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.
Hi Strong Eagle,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?
The bank is only aware that the purpose of this loan was for company operational expansion and not for the purchase of property.I am curious - did the Bank inquire into or aware of the purpose of this loan?
Glad to hear that.nimblynimb wrote:The bank is only aware that the purpose of this loan was for company operational expansion and not for the purchase of property.I am curious - did the Bank inquire into or aware of the purpose of this loan?
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.
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