Loan to Directors of Malaysia Companies
Unless otherwise indicated, the company stated in this article refers to the private company incorporated in Malaysia in accordance with the Malaysian Companies Act 2016 (CA 2016).
Loans to directors in Malaysia are primarily governed by the CA 2016, which is the principal legislation that regulates companies in the country. Specific provisions in the CA 2016 address the issue of financial transactions between the company and its directors, including loans, advances, and guarantees.
Generally, a company is prohibited from making loans or providing guarantee or security to its directors. The company’s constitution may provide additional clarity or rules on the provision of loan, guarantee and security to directors but it cannot override the statutory restrictions and requirements imposed by the CA 2016. There are instances when a company may extend a loan, guarantee or security to a director. This article seeks to explore the exceptional circumstances, the repercussions if the directors misuse their authority, and the recourse options available to a company when confronted with such a predicament.
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Forms of Financial Assistance
(1)
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Loan
A loan is the provision of money from one person to another, with an agreement to repay the amount. The borrower incurs an obligation and is anticipated to pay interest. Loan conditions are established prior to any funds being disbursed. Loans can be secured by collateral, such as a mortgage, or unsecured, akin to a credit card. They may be provided as a fixed amount or made available as an open-ended line of credit with a predefined maximum limit.
There are 3 types of loans for directors:
(a) Cash advances or short-term loan to be repaid in lump sum;
(b) Payment made on behalf of the director; and
(c) A loan formalised in a contractual agreement, usually for a longer term and repaid by installments.
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(2)
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Guarantee
A guarantee is an agreement in which one party commits to fulfilling a promise or covering the obligations of a third party if they default. Should the primary debtor fail to fulfill his or her obligations, the guarantor consents to indemnify the creditor’s loss. For instance, a company provides a corporate guarantee to the bank for a loan secured by its director.
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(3)
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Security
A security is an asset offered as collateral to ensure loan repayment, obligation fulfillment, or adherence to an agreement. For example, a director procures a loan from a bank, and the company permits a charge to be placed on its property in favour of the bank.
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Exceptions
The circumstances under which a company is permitted to extend loans, or provide security or guarantees for loans to directors, as outlined in Section 224(2) of the CA 2016, are as follows:
(1)
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The company is an exempt private company.
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(2)
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The loan is meant to cover expenditures pertaining to company business.
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(3)
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The loan is provided to a full-time director for the purpose of acquiring a home; or
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(4)
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A resolution has been passed to approve a scheme for providing loans to full-time directors.
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Exempt Private Company
Pursuant to Section 2(1) of the CA 2016, an "exempt private company" is a private company with no direct or indirect beneficial interest held by any company and comprising not more than 20 members whereby none of whom are companies.
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Recourse Options
Where there is no prior approval granted by the company for the provision of loan, guarantee or security to the directors, the company may ratify such provision within 6 months. In circumstances wherein the company did not sanction the loan or security, the director who authorised the loan, guarantee or security shall be jointly and severally liable to compensate the company for any loss incurred.
In addition, the company may take legal action against the director for violating his statutory and fiduciary duties owed to the company. According to Section 224(10) of the CA 2016, a director who is found guilty could face a term of imprisonment of up to 5 years, a fine of up to RM3 million, or both.
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Conclusion
In a nutshell, a company is not permitted to extend loans or provide guarantee or security to its directors unless there is unequivocal approval granted by the company where the purpose and nature of the loan are distinctly disclosed. The relevant provisions in the CA 2016 aimed at protecting the company from potential conflicts of interest, ensuring that directors are not able to manipulate their position for personal financial gain, and promoting good corporate governance practices. Violating these provisions could lead to legal penalties, personal liability for directors, and reputational damage for the company. Therefore, transparency, accountability and compliance should be at the forefront of any decision-making process pertaining to loans to directors.
Kaizen, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professionals in Kaizen for further clarification.
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