If a director or shareholder would like to loan money from the company, there are certain restrictions and procedures to be adhered to. It is generally not permitted for a director to loan money from the company except in certain circumstances. It is possible for shareholders to loan money from the company.
Loans to Directors
In general, directors of a company or of a related company (i.e. holding or subsidiary companies), are not allowed to loan money from the company. This restriction also extends to the directors’ related persons.
Related persons can be the following:
- The director’s family members including spouse, children (includes adopted and step-children), parents and siblings.
- The lending company is not an exempt private company and the director, and or his family members have at least 20 per cent voting interest in the company or the limited liability partnership that is taking the loan.
In the second situation, a loan can still be made if approval from the lending company is sought through a general meeting. The interested director and his family members are not allowed to vote at that meeting.
Instances where loans to directors are permitted:
- If the loan is made out to the director for the purpose of meeting expenditure which the director may incur for the purpose of discharging his duties as a director of the company.
- If the director is in full-time employment with the company or related company and the purpose of the loan is for the director to acquire a home to live in.
- If the director is in full-time employment with the company or related company and the loan is given in accordance with a scheme to benefit employees. This scheme must be approved in a general meeting.
- If the ordinary business of the company includes the business of lending money and the loan given to the director is in the context of the company conducting its ordinary course of business. The company will need to have the relevant licences and be regulated by the laws relating to banking and finance or be regulated by the Monetary Authority of Singapore.
If the loan is granted based on the first two instances, approval must be obtained at or before the next following annual general meeting (AGM). The amount of the transaction must be repaid within 6 months from the AGM. The directors who authorised the loan will be liable in indemnifying the company from any potential losses.
Any director who authorises the making of a loan that contravenes the above will be guilty of an offence and be liable to a fine of up to SGD$20,000 or face up to 2 years imprisonment.
There is no legal requirement for interest rates for such loans. The loans can be at market rate, interest-free or subsidised. Any interest benefits are taxable and need to be included in the director’s personal income tax returns. The value of the interest benefit can be calculated by multiplying the amount of the loan outstanding as at 31st December of each year by the average prime lending rate for that particular year.
The director has a statutory duty to disclose any interest that he or she may have in any loan transaction with the company. This conflict of interest must be disclosed at a directors’ meeting and a letter must be sent to the company detailing the nature of the conflict. Thus if the director has reason to believe that a certain loan will be detrimental to the company, he or she must not allow this loan to be disbursed.
Any director who is found to have improperly taken loans from the company in breach of his duty to act honestly will be liable to a fine of up to SGD$5,000 or face up to 12 months imprisonment. The director will also be liable for any profit made or any damage suffered by the company due to his or her breach of duty.
Loans to Shareholders
As shareholders do not have the same duties and responsibilities as company directors, there are no restrictions when it comes to the company loaning monies to shareholders. The terms of the loan are determined by the directors and the directors must act in the best interest of the company. Any interest benefit which the shareholder may receive will not be taxable.
Loans to Director-Shareholder
The treatment of loans to directors who are also shareholders is slightly different. There are certain factors to be taken into account if a director-shareholder would like to enter into a loan agreement with the company as a shareholder.
- There must be legitimate non-tax reason for the monies disbursed to be in the form of a loan rather than as dividends
- There must be evidence of a genuine attempt to create a debtor-creditor relationship and there must be a loan agreement with a repayment schedule.
- If there are loans to other shareholders, the terms and amounts should be similar. The amount should not vary based on the borrower’s position in the company.
- It must be documented that the loan is given to the director-shareholder in the capacity as a shareholder. This should be in the form of a directors’ resolution and meeting minutes.
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.
The editorial team at Singapore Secretary Services
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