By AZIZAM AZIZAN
LOAN TO DIRECTORS AD OTHERS PARTIES
The Companies Act of 2016 (Act) establishes the duties and obligations of directors as company officers. A director is typically prohibited under the Act from taking loans from the business or any linked firm, even if the company is in a solid financial position to provide a loan. Having said that, there are times when a firm can provide a loan to a director.
What constitute a loan?
A loan is the transfer of money from one person to another with an agreement to repay it.
The recipient, or borrower, incurs a debt and is typically expected to pay interest for the use of the money.
Loan conditions are agreed upon by each side before any money is advanced.
A loan may be secured by collateral, such as a mortgage, or it may be unsecured, such as a credit card.
Loans may be for a particular, one–time sum, or they may be available as an open–ended line of credit up to a predetermined maximum.
Guarantee
A contract to execute a promise or relieve the responsibility of a third party in the event of his default. If the major debtor fails to meet his commitments, the guarantor agrees to make up the creditor’s loss. For example, a director obtains a loan from a bank, and the company gives a corporate guarantee to the bank.
Security
An asset committed to guarantee loan repayment, obligation fulfilment, or agreement compliance. For example, a director obtains a loan from a bank, and the company consents to a charge being placed on its land in favor of the bank.
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
Prohibition of loans to persons connected with directors
Section 225 of CA 2016 states:
(1) Subject to the provisions of this section, a company, other than an exempt private
company, shall not—
(a) make a loan to any person connected with a director of the company or of its holding
company; or
(b) enter into any guarantee or provide any security in connection with a loan made to such
person by any other person.”
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.
Can a company lend to or provide guarantee or security for a loan made to its associated company?
If your company is in a good financial position to give a loan to another company, it is important that you understand and know if this is allowed under the laws of Malaysia. It is important to note that an associated company does not fall under the definition of “related corporation” in the CA 2016. Section 7 of CA 2016 states:
“A company is considered to be related to another if—
(a) it is a holding firm of another corporation;
(b) it is a subsidiary of another firm; or
(c) It is a subsidiary of another corporation’s holding company.”
In short, a firm’s “related company” is its holding company (including the ultimate holding company), its subsidiary (whether totally owned or not), or its fellow subsidiary company.
Subsidiary Company:
A subsidiary company is a company that is controlled, either directly or indirectly, by another company known as the “parent” or “holding” company. The parent company typically owns more than 50% of the voting shares of the subsidiary, giving it the authority to make decisions and exert control over the subsidiary’s operations and management. Subsidiaries can be wholly owned (100% ownership) or partially owned by the parent company.
Holding Company:
A holding company is a company that owns the majority of shares in one or more other companies (subsidiaries) but doesn’t necessarily engage in the day–to–day operations of those subsidiaries. Instead, its primary purpose is to own and control other companies, often for strategic reasons like diversification, management consolidation, or tax benefits. Holding companies may have different subsidiaries operating in various industries.
An associated company, also known as an “associate” or “equity–method investee,” refers to a company in which another company holds a significant but not necessarily majority ownership stake, usually between 20% and 50% of the voting shares. Unlike subsidiaries, associated companies are not under the direct control of the investing company, but the investing company does have influence over certain decisions and financial matters.
Related Company:
A related company is a broad term that can refer to companies that have some form of connection, often beyond just ownership. This connection can be based on shared ownership, common management, joint ventures, or contractual relationships. Related companies might collaborate on projects, share resources, or engage in mutual business interests. In the case of a joint venture company or jointly controlled entity, where the voting power or control of the company is on equal or 50:50 basis, it can be considered as an associated company of the investor company.
If the business does not authorise a loan or security, the director who authorised the loan or filed the guarantee shall be jointly and severally accountable to reimburse the company if the company suffers damages. The corporation may also take legal action against the director for
breaching his statutory and fiduciary responsibilities to the company. Sections 224(6) and 224(7) of the Act provision for this. According to Section 224(10) of the Act, a director who is found to have unlawfully received loans from the firm faces up to five years in jail or a fine of up to three million ringgits, or both.