Company Loans to Directors/Shareholders in Singapore

Last updated on May 6, 2019

Stack of cash and Company Loan Agreement

If you are a shareholder or director of a company looking to enter into a loan agreement with that company, there are a number of restrictions that you must know about.

Generally, it is not permitted for a director to take a loan from the company. However, it is possible to do so if you follow the rules in place to ensure proper corporate governance.

Directors (and Related Persons) Taking a Loan from the Company

There are many reasons why a director may wish to take a loan from their company.

One situation is where the director requires funds to carry out business on behalf of the company. This may be an attractive option where the company has surplus cash in a tight lending market (where higher interest rates may be charged by money lending institutions).

Restricted loans

However, the general rule is that loans made by a company to its director, or to a director of a related company (referred to as a “relevant director” in this article), are not permitted. Related companies are those that belong in the same group, e.g. as holding or subsidiary companies.

This general rule applies not just to standard loan agreements, but also to all quasi-loans, credit transactions and guarantees that are made for the benefit of a relevant director.

A quasi-loan is a transaction where the company would agree to pay a sum incurred by the director or relevant director on the terms that the director or relevant director would repay or reimburse the company.

Credit transactions cover transactions where the company would:

  • Supply goods or dispose of immovable property under a hire-purchase agreement or conditional sale agreement;
  • Lease or hire immovable property or goods in return for periodic payment; or
  • Otherwise dispose of immovable property, supplies, goods or services, on the understanding that payment is to be deferred.

Finally, guarantees include the company entering a guarantee or providing security for a loan, quasi-loan, or credit transaction made by or for the benefit of a director.

Related persons

The restrictions on granting loans from company to directors and relevant directors also apply to these directors’ related persons. There are two types of related persons that the Companies Act (CA) identifies.

The first are the director’s family members, who include the director’s spouse, children (including adopted children) and step-children. In other words, such family members of the director are generally not allowed to obtain loans from the director’s company.

The second type is where the lending company is not an exempt private company, and its director has a 20% voting interest or more in the company or limited liability partnership that is taking the loan (referred to as an “interested director” in this article). An exempt private company is one with less than 20 members, and no company has any beneficial interest in its shares.

In such a situation, this borrowing company or limited liability partnership will also be considered a related person. Any loan between these entities will need prior approval from the lending company in a general meeting. The interested director (and his family members) will also have to abstain from voting on it.

For the purposes of determining whether the director has the requisite interest in the borrowing company to trigger the restrictions in the CA, the interests of the director’s family members are deemed to be the interests of the director. The implications of this are that even if the director does not have a 20% or more voting interest in the borrowing company, the loan will still require prior approval if the director’s family members cumulatively have such an interest.

Exceptions to restricted loans

There are a number of exceptions to the general rule. Loans made to a relevant director are permitted in the following scenarios:

  1. Where the loan is made to the relevant director for the purposes of meeting expenditure that the director incurs for company purposes, or for the director to properly fulfil his duties as a director.
  2. Where the director is in full-time employment of the company or a related company, and the loan is for the purpose of acquiring a home for the relevant director to live in (provided not more than one such transaction is outstanding).
  3. Where the relevant director is in full-time employment of the company or a related company, and the loan given is in accordance with a scheme to benefit employees. This scheme must have been approved in a general meeting.
  4. Where the company’s ordinary business includes the lending of money and the loan is given to the relevant director in the ordinary course of business. The company’s activities must also be regulated by written laws relating to banking, finance or insurance, or regulated by the Monetary Authority of Singapore.

In addition, as suggested above, lending companies which are exempt private companies may make loans to a borrowing company even if a director of the lending company has a 20% or more voting interest in the borrowing company.

Obtaining approval for the loan

If the loan fits under the first two stated exceptions, approval for the loan must be obtained from the company at a general meeting. During this meeting, the purpose and amount of the loan must be disclosed.

Additionally, the loan must be made under the condition that if such approval has not been obtained at or before the next following Annual General Meeting (AGM), the amount of the transaction will be repaid within 6 months from the conclusion of the AGM. The directors who authorised the loan will also be jointly and severally liable to indemnify the company from any losses incurred from the loan being made.

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 (as mentioned above).

What happens if the restrictions are contravened?

Any director who authorises the making of a loan in contravention of the allowed exceptions and approval requirements will be guilty of an offence. Such director(s) will be liable to a fine of up to $20,000 or imprisonment for up to 2 years.

Interest rates and tax implications

There are no legal requirements as to the interest payable for a loan from a company to its director or related persons. Therefore, it is possible for such loans to be interest-free, or subsidised (where a third-party pays for the loan interest).

However, such loans may be taxable. As company directors are considered to be employees of the company under income tax law, any benefit derived from a loan from the company is deemed to be an employment benefit if it was obtained in the director’s capacity as a director of the company. Hence, interest benefits are taxable as employment benefits.

The value of the interest benefit can be determined by multiplying the amount of the loan outstanding as of 31 December of each year, by the average prime-lending rate for that year.

However, if the director is also a shareholder, and the loan is provided to the director in his or her capacity as a shareholder (instead of his or her capacity as director), any interest benefits would not be employment benefits and would thus not be taxable.

Whether a loan by a director-shareholder of a company is taken in the capacity as a shareholder, or as a director, depends on the facts of the situation. The following factors are taken into account in this assessment:

  • There are legitimate, non-tax reasons for it to be in the form of a loan instead of dividends.
  • There must be evidence of genuine intent to create a debtor/creditor relationship and that there are reasonable expectations that the loan be repaid. This can be demonstrated by the presence of a repayment schedule in the loan agreement.
  • There are loans extended to other shareholders of similar terms and amount. The amount should also not depend on the position of the borrower in the company.
  • There is documentary evidence that the loan is provided to the borrower in their capacity as a shareholder. This may be in minutes of meetings, directors’ resolutions, etc.

Disclosure of interests and directors’ duties

Directors also have a statutory duty to disclose any interest they have, direct or indirect, in any transaction or proposed transaction with the company. This would include any loan taken by the director or related persons from the company.

The nature of this interest must be disclosed at a directors’ meeting. Additionally, a note must be sent to the company detailing the nature, character, and extent of the interest. These steps must be taken as soon as practicable after the director becomes aware of the interest.

Directors also have a statutory duty to act honestly and use reasonable diligence when performing their duties as a director. A director must not use his or her position or knowledge acquired by virtue of his or her position to cause any benefit to himself or any other person or to cause harm to the company.

For example, when a director makes the decision to enter into a loan agreement with the company, the director must honestly believe that the loan will not be detrimental to the company.

If a director is found to have improperly taken loans from the company in breach of his duty to act honestly, he or she is liable for any profit made, or damage suffered by the company due to his wrongdoing. Furthermore, he or she faces a fine of up to $5,000 or imprisonment up to 12 months.

Shareholders Taking a Loan from the Company

Shareholders of a company do not owe the same duties and responsibilities to the company that a director does. Due to this, there are no legal restrictions concerning loans from the company to a shareholder.

Whether a loan from the company to a shareholder is permissible, and on what terms, is dependent on the decision of the board of directors.

When deciding whether or not a loan to a shareholder should be granted, the directors must act in accordance with their duties as a director.

Interest rates and tax implications

As explained above, if a loan is taken from the company by a shareholder in their capacity as a shareholder, any interest benefits would not be taxable.

Directors or Shareholders Loaning Money to the Company

It is extremely common, especially with start-ups in their early stages, for companies to receive funding in the form of loans from its directors or shareholders.

Unlike the numerous issues with directors and shareholders loaning money from the company, loaning money to the company is relatively straightforward.

Approval for the loan need only be given by the board of directors. Further, such loan agreements may not contain extensive representations which are typically made by the borrower to induce the lender into entering the agreement.

Examples of such representations may include assertions that:

  • The borrower is capable of complying with its obligations under the agreement.
  • All financial information relevant for the lender to assess whether it wishes to become a creditor has been provided and is accurate.

A possible reason why such loan agreements may be more simplistic is that being a shareholder or director of the company, the lender is often cognisant of the company’s financial situation, or in a better position to find out about this.

For example, they are empowered by the CA to access the company’s financial statements, and may also be aware of the company’s future business plans. Hence, they may not require as many representations from the company to be induced into entering into the agreement.

Interest rates and tax implications

Due to the relationship between a director or shareholder and the company, any loan from a director or shareholder to the company can be interest-free.

There are a plethora of considerations to take into account when structuring your loan or drafting your loan agreement. To ensure you are complying with all legal requirements and restrictions, get in touch with one of our corporate lawyers for assistance.

Appointment and Removal of Company Officers and Other Key Personnel
  1. What is a Nominee Director, How to Appoint and Other FAQs
  2. Independent Directors: Who are They and What is Their Role?
  3. Board of Advisors: Who Are They and What Is Their Role?
  4. Appointing Company Directors in Singapore: Eligibility, Process etc.
  5. Managing Director vs CEO in Singapore: Roles and Obligations
  6. Guide to Directors' Remuneration in Singapore
  7. Directors' Duties in Singapore
  8. Shadow Directors: Who are They and What Duties Do They Owe to the Company?
  9. How to Remove a Director from a Company in Singapore
  10. Removal and Resignation of Company Auditor in Singapore
  11. Appointing a Company Secretary: Roles and Responsibilities
  12. Appointing an Authorised Representative for Foreign Companies in Singapore
  13. Process Agents in Singapore
Holding Meetings
  1. What are Annual General Meetings (AGMs) in Singapore?
  2. How to Hold Extraordinary General Meetings (EGMs) in Singapore
  3. How to Hold a Board Meeting in Singapore
Shareholder Matters
  1. Share Buybacks in Singapore: Procedure, Cost and More
  2. How to Split Shares (or Stocks) in a Singapore Company
  3. 2 Ways to Remove a Singapore Company Shareholder ASAP
  4. What are Treasury Shares? Guide for Singapore Companies
  5. Guide to Paid-Up Capital in Singapore (Is $1 Enough?)
  6. Preparing a Register of Shareholders for a Singapore Company
  7. How to Issue Shares in a Singapore Private Company
  8. Guide to Transferring Shares in a Singapore Private Company
  9. Your Guide to Share Certificates in Singapore: Usage and How to Prepare
  10. Shareholder Rights in Singapore Private Companies
  11. Shareholder Roles and Obligations in Singapore Companies
  12. Dividend Payments Guide for Singapore Business Owners
  13. Share Transmission: What Happens If a Shareholder Dies in Singapore?
  14. How to Reduce the Share Capital of Your Singapore Company
  15. Buy-Sell Agreements: How to Write & Fund Them in Singapore
  16. Oppression of Minority Shareholders
Compliance
  1. Is Your Business Collaboration Competition Law-Compliant?
  2. Explained: Registered Filing Agent for Singapore Businesses
  3. Transfer Pricing Obligations of Singapore Companies
  4. Adhering to Trading Sanctions and Restrictions in Singapore
  5. Cyber Hygiene Compliance Guide for Singapore Companies
  6. Corporate Social Responsibility For Businesses in Singapore
  7. Essential Regulatory Compliance Guide for Singapore Companies
  8. Dormant Companies and Their Filing Obligations in Singapore
  9. Anti-Money Laundering Regulations and Your Business: What You Need to Know
  10. Price-Fixing, Bid-Rigging and Other Anti-Competitive Practices to Avoid
  11. Legally Conducting Lucky Draws for Singapore Businesses
  12. Restaurant Inspection and Food Safety Rules in Singapore
Company Management
  1. Does Your Company Need a Legal Team (In-House Counsel)?
  2. Acqui-Hiring of Singapore Companies: How Does It Work?
  3. How to Change the Name of Your Singapore Company
  4. Can Directors be Liable for Company Debts in Singapore?
  5. Company Loans to Directors/Shareholders in Singapore
  6. 3 Types of Insurance Every Singapore Business Needs
  7. Creating and Registering Charges in Singapore: Guide for Companies
  8. Guide to Effective Business Continuity Planning in Singapore
  9. Business Asset Sale & Disposal in Singapore: How Do They Work?
  10. Business Partnership Disputes in Singapore: How to Resolve
  11. How to Commence a Derivative Action on Behalf of a Company in Singapore
  12. Business Will: How to Pass on Your Business to Your Successors in Singapore
Company Documents
  1. Record-Keeping Requirements for Singapore Companies
  2. Company Constitutions in Singapore and How to Draft One
  3. Company Memorandum and Articles of Association
  4. Company Resolutions: What are They?
  5. Board Resolutions in Singapore
  6. Minutes of Company Meeting in Singapore: How to Record
  7. How to Set Up a Register of Controllers
  8. How to Set Up a Register of Nominee Directors
  9. Guide to Filing Financial Statements for Singapore Business Owners
  10. Filing Annual Returns For Your Business
Tax, Accounting and Audit Matters
  1. Carbon Tax in Singapore: What is the Rate and Who Must Pay?
  2. Laws and Penalties for GST Evasion in Singapore
  3. 6 Common Taxes in Singapore For Individuals & Businesses
  4. Singapore Corporate Tax: How to Pay, Tax Rate, Exemptions
  5. Start-Up Tax Exemption Guide for New Singapore Companies
  6. GST Registration: Requirements and Procedure in Singapore
  7. What is Withholding Tax and When to Pay It in Singapore
  8. Singapore Influencers: Here's How to Calculate Your Income Tax
  9. Tax Investigation of Tax-Evading Business Owners in Singapore
  10. Small Business Accounting Services in Singapore
  11. Company Audits in Singapore: Requirements and Exemptions
Data Protection
  1. Suspect a PDPA Data Breach? Here's What to Do Next
  2. Must You Notify PDPC About a Data Breach in Your Business?
  3. Data Room: Should Your Singapore Company Set Up One?
  4. Victim of a Data Breach? Here’s What You Can Do
  5. Summary: Your Organisation's 10 Main PDPA Obligations
  6. Essential PDPA Compliance Guide for Singapore Businesses
  7. PDPA Consent Requirements: How Can Your Business Comply?
  8. Is It Legal for Businesses to Ask for Your NRIC in Singapore?
  9. Here's a 7-Step Plan for Companies to Prevent Unauthorised Disclosure When Processing and Sending Personal Data
  10. Cloud Storage of Personal Data: Your Business’ Data Protection Obligations
  11. Drafting a Comprehensive Privacy Policy For Your Singapore Website
  12. GDPR Compliance in Singapore: Is it Required and How to Comply
  13. Appointing a Data Protection Officer For Your Business: All You Need to Know
  14. How Can Companies Dispose of Documents Containing Personal Data?
  15. Check the Do-Not-Call Registry Before Marketing to Singapore Phone Numbers
  16. How to Legally Install CCTVs for Home/Business Use in Singapore
  17. Is Web Scraping or Crawling Legal in Singapore?
  18. Legal Options If Employees Breach Confidentiality in Singapore
Marketing
  1. Social Media Marketing: Legal Guide for Singapore Businesses
  2. Your Guide to E-commerce Website Terms of Service in Singapore
  3. Dealing with Defamation of Your Business: Can You Sue?
  4. Sending Email Newsletters That Comply With Singapore Law
  5. A legal guide to drafting a social media policy for your company
  6. Your Guide to a Media Release Form in Singapore
  7. Your Guide to an Influencer Marketing Agreement in Singapore
  8. Outdoor Advertising: How to Legally Display Public Ads in Singapore
Fintech and Payment Services Advisory
  1. A Guide to Digital Bank Regulation in Singapore
  2. Applying for a Major Payment Institution Licence in Singapore
  3. Applying to the MAS FinTech Regulatory Sandbox
  4. Payment Services Act Licensing Guide for Fintech Businesses
  5. How to Get a Payment Service Provider Licence in Singapore
  6. Financial Adviser's Licence Guide for Singapore Businesses
  7. Capital Markets (CMS) Licence Requirements in Singapore
  8. How to Offer E-Wallet Services in Singapore: Licensing Guide
  9. Digital Payment Token Services Licence Guide in Singapore
  10. How to Legally Offer Crypto Services in Singapore
Franchising
  1. Starting a Franchise in Singapore: What Franchisors Should Look Out For
  2. Running a Franchise in Singapore: What To Look Out for as a Franchisee
Debt Restructuring
  1. What is Judicial Management and How It Works in Singapore
  2. Schemes of Arrangement: How They Work and How to Apply
  3. Informal Debt Restructuring and Workout in Singapore
Ending a Business
  1. How to Restore a Struck-Off Company in Singapore
  2. Claw-Back of Assets From Unfair Preference and Undervalued Transactions
  3. Should You Save or Close Your Zombie Company in Singapore?
  4. Voluntary Suspension of Business in Singapore: How to Handle
  5. Winding Up a Singapore Company: Grounds and Procedure
  6. Closing Your Singapore Business: What You Need to Settle
  7. Striking Off a Company
  8. Restoring a Company That was Struck Off Without You Knowing
  9. Dissolution of partnerships in Singapore
  10. What Should a Creditor Do When a Company Becomes Insolvent?
  11. How to File a Proof of Debt Against a Company in Liquidation
  12. Validation of Payments Made by Companies Being Wound Up