Chandra Mohan [Managing Director]
Founder / Senior Audit Partner / FCA [Singapore] / FCCA / CPA [Aust] / MBA
Published 10 December 2024

Directors’ Loans in Singapore: Compliance, Benefits, and Restrictions

As a small company director in Singapore, you may have questions about taking loans from your company. Let’s explore some common queries and provide clarifications based on the Singapore Companies Act (“the Act”).

Q: Can a director take a loan from a company in Singapore?

A: Generally, no. Under Section 162(1) of the Act, directors are prohibited from taking loans from their company. However, there is an exception for “exempt private companies,” which are smaller companies with fewer than 50 shareholders and no public debt.

Q: What does the Singapore Companies Act say about directors’ loans?

A: The Act imposes strict rules to prevent conflicts of interest and safeguard company assets. Non-exempt companies must adhere to these regulations, which prohibit loans, guarantees, credit arrangements, and other financial transactions between the company and its directors.

Q: Does loan restrictions apply to all companies?

A: No. It does not apply to Exempt Private Companies.

Q: What is the difference between exempt and non-exempt companies?

A: Exempt private companies are defined as companies with fewer than 20 shareholders and no corporate shareholders. These companies can provide loans to directors without breaching the Act.

Non-exempt companies, however, must follow stringent rules to prevent misuse of company funds by directors.

Q: What constitutes a restricted transaction with Directors?

1. 1. Definition of Restricted Transactions: A company engages in a restricted transaction if it:
      • Loans or Quasi-Loans: Provides a loan or a financial arrangement similar to a loan to a director of the company or a director of a related company.
      • Guarantees and Securities: Offers a guarantee or security for a loan or quasi-loan from another party to a director.
      • Credit Transactions: Enters into a credit transaction where the company acts as a creditor for the benefit of a director.
      • Guarantees for Credit Transactions: Provides a guarantee or security for a credit transaction made by another party for a director’s benefit.
      • Third-Party Arrangements: Participates in arrangements where another party enters into a transaction that would be considered restricted if done by the company, and that party benefits from the company or a related company.
      • Assignments and Assumptions: Arranges for the company to take on rights, obligations, or liabilities of a transaction that would be restricted if directly entered by the company.
   2. Prohibition on Restricted Transactions: Generally, companies (other than exempt private companies) are prohibited from engaging in these types of transactions with their directors, except as allowed under specific exemptions or conditions outlined in subsections (3) and (4) and sections 163A and 163B.

Q: What is the rationale behind the prohibitions on directors’ loans?

A: The rationale behind the prohibitions includes:

1. 1. Prevention of Conflicts of Interest: By prohibiting loans, the Act ensures directors do not use their influential positions for personal financial gain, which could compromise their fiduciary duties.
   2. Protection of Company Assets: The prohibition safeguards company assets from being diverted for personal use, thus protecting the company’s financial health and its obligations to creditors and shareholders.
   3. Safeguarding Creditor Interests: Ensuring company funds are available for creditor claims is critical for maintaining financial stability and trust in the company.
   4. Ensuring Legal Compliance: Compliance with these rules is crucial as directors engaging in prohibited transactions may face severe legal consequences, including fines or imprisonment.

Q: Are there any exemptions to the prohibition on loans to directors?

Exceptions to the Prohibition on Directors’ Loans

162 Section (3) of the Act outlines conditions under which transactions that would typically be restricted are permitted. These exceptions include:

1. 1. Expenditure for Company Purposes: Transactions made to benefit a director to cover expenses for company-related activities or to enable them to perform their duties effectively.
   2. Home Purchase for Full-Time Directors: Loans made to full-time directors for purchasing or acquiring a home, with the condition that only one such loan can be outstanding at any given time.
   3. Employee Benefit Schemes: Transactions under an approved scheme for full-time employees, including directors, if the scheme has been sanctioned at a general meeting.
   4. Ordinary Course of Business: Transactions conducted in the regular business activities of a company involved in lending money or providing guarantees, provided the company is regulated by relevant banking, finance, or insurance laws or supervised by the Monetary Authority of Singapore.

Section (4) further stipulates that exceptions under subsection (3)(a) and (b) require:

• • Prior Approval: Transactions must be approved at a company general meeting where the purpose and amount are disclosed.
  • Conditional Reversion: If approval is not obtained by the next annual general meeting, the transaction must be reversed within six months following that meeting.

Q: How about shareholders? Can they take loans from the company?

A: Unlike directors, shareholders do not have the same legal restrictions when obtaining loans from the company. This is because shareholders do not owe fiduciary duties to the company in the same way directors do.

Q: What is the Legal Consequences if director loan breaches the Act?

A: When a company contravenes this section, any director who authorizes the making of the restricted transaction is guilty of an offence and, upon conviction, may be liable to a fine not exceeding $20,000 or imprisonment for a term not exceeding two years.

Q: Why might directors want to take loans from their company?

A: There are several potential benefits for directors:

• • Lower Interest Rates: Companies may offer loans at lower interest rates compared to banks or other financial institutions. This can be particularly appealing when market interest rates are high, as it allows directors to save on interest expenses.
  • Flexible Terms: Loans from a company can often be structured with more flexible terms, including repayment schedules and interest rates. This flexibility can be tailored to suit the director’s financial situation and needs, providing a level of customization that is typically not available with traditional lenders.
  • Control Over Repayment: Directors may have more control over the repayment process when borrowing from their own company. This can include the ability to negotiate terms that align with their personal cash flow needs, making it easier to manage repayments without financial strain.
  • Tax Advantages: In some cases, taking a loan from the company might offer tax benefits. For example, there may be opportunities to structure the loan in a way that minimizes personal tax liabilities, which can be more advantageous than receiving income through other means such as dividends.
  • Avoiding Personal Credit Checks: Borrowing from the company may not require the same level of personal credit scrutiny as borrowing from a bank. This can be beneficial for directors who prefer to keep their personal financial information private or who may not have the credit profile required for a traditional loan.

Q: Should there be a loan agreement for directors’ loans?

A: Yes, even for exempt companies, a formal loan agreement is crucial. This document should outline the terms, interest rates, and repayment schedule, ensuring transparency and mutual understanding.

Q: What are the resolutions and approvals required?

Ordinary Resolution:

An ordinary resolution may be typically required to approve loans made to a director or a connected person. This resolution must be passed by the shareholders of the company.

The resolution should clearly state the terms of the loan and the identity of the director involved.

For transactions involving a company where the director has at least 20% voting interest, such transactions are permitted as long as prior approval from the company has been obtained in a general meeting. However, the interested director and his family members must abstain from voting

Board Resolution:

In addition to shareholder approval, a board resolution may also be necessary. This resolution is often required to authorize the loan at the board level before it is presented to shareholders.

Approval Process – Shareholder Approval:

Member approval is necessary for loans, quasi-loans, and related guarantees made by the company to a director or a person connected with a director.

The approval process must comply with relevant sections of the Act, which outlines the requirements for loans to directors.

In summary, to approve a director’s loan, both an ordinary resolution from shareholders and a board resolution are typically required. This ensures that the transaction is transparent and compliant with legal standards, protecting the interests of the company and its stakeholders.

Q: Do we need shareholders’ approval for directors’ loans?

A: In many cases, yes, especially for non-exempt companies and when the director has a significant voting interest in the company. Shareholder approval helps maintain proper governance and prevents conflicts of interest.

Q: How do bankers view directors’ loans when processing bank loans?

A: Bankers may view directors’ loans as a potential risk factor when assessing a company’s creditworthiness. Excessive or unsecured loans to directors could raise concerns about the company’s financial stability and governance practices, which may affect the bank’s willingness to extend credit.

Q: Are there any bank covenant restrictions on directors’ loans?

A: Yes, bank loan agreements often include covenants that restrict or prohibit loans to directors without the bank’s prior consent. Violating these covenants could lead to a default on the bank loan, emphasizing the importance of reviewing and complying with loan agreement terms.

Q: Can company constitutions restrict directors’ loans?

A: Yes, a company’s constitution can impose additional restrictions on directors’ loans beyond the statutory requirements. These restrictions might include lower thresholds for shareholder approval or an outright prohibition on such loans. It is essential to review the company’s constitution to ensure compliance with any internal rules.

Q: What Should Be Included in Director Loan Documentation?

A: It usually involves a concise loan agreement approved by the company through a formal resolution. Key elements to include are:

• • Loan Amount: Clearly specify the principal amount of the loan to avoid any ambiguity.
  • Repayment Terms: Outline the repayment schedule or conditions that might trigger repayment. This ensures both parties understand when and how repayments will occur.
  • Interest Terms: Indicate whether interest is applicable and, if so, specify the rate and terms. This is crucial for understanding any additional costs associated with the loan.
  • Usage Conditions: Include any conditions regarding how the loan funds can be used, ensuring that the loan is utilized for appropriate purposes.
  • Impact of Corporate Events: Detail how certain events, such as the sale of the company, might affect the loan terms, providing clarity on how the loan will be treated in various scenarios.
  • Director’s Loan Account: Maintain a detailed record of the loan transactions in a director’s loan account, tracking all amounts borrowed and repaid for transparency.
  • Approval Documentation: Clearly document the approval process, including board resolutions or shareholder approvals, to demonstrate compliance with corporate governance standards.
  • Tax Implications: Address any potential tax implications associated with the loan, ensuring awareness of any tax responsibilities for both the company and the director.
  • Default Provisions: Include clauses specifying the consequences of default, such as penalties or accelerated repayment terms, to protect the company’s interests.
  • Amendment Procedures: Outline the process for amending the loan agreement if circumstances change, ensuring that any modifications are formally documented and approved.
  • Legal Compliance: Ensure that the loan agreement complies with all relevant legal and regulatory requirements pertinent to the jurisdiction.

Incorporating these elements into director loan documentation helps provide clarity, protect both the company and the director, and ensure compliance with legal and corporate governance standards.

Conclusion While directors’ loans can offer benefits, compliance with legal frameworks, bank covenants, and internal company rules is crucial. Understanding the Act’s requirements, the rationale behind the restrictions, and the available exemptions, as well as the potential impact on bank financing and corporate governance, helps ensure your company operates smoothly and avoids legal and financial issues.

We at SC Mohan can assist small companies in advising on this area. Please contact us at +65 9144 1840 or email accounts_1@scmohan.com.sg or office@scmohan.com.sg for further assistance. Our experienced staff would be happy to help.

Stay tuned for our next blog post, where we’ll discuss accounting for director loans, audit matters, and income tax considerations.

Disclaimer

The information in this blog is for general informational purposes only and does not constitute professional advice. While we make every effort to ensure accuracy, we recommend seeking professional guidance before making any business decisions. The opinions expressed are those of the writer, and specific circumstances may vary. For Director loan and implementation for Small Entities, please consult qualified company secretary, lawyer and accounting professionals.